Financial Foundations: Budgets And Credit Scores (Podcast)

Rebecca Pavese
Morning, Amy. It's great to be back. Looking forward to talking.

Amy Laburda
So Rebecca, in our company's book The High Achiever's Guide to Wealth, one of the chapters you contributed is Chapter Three, “Being Smart About Budgets and Credit.” I think a lot of people

00:36
have a sense that budgets are important, in sort of an abstract way. But are they important enough to be putting them right up front at the beginning of our book?

Rebecca Pavese
I think they are appropriately placed at the beginning of the book, because budgets are a building block to a strong financial foundation. It's crucial to have a strong foundation before you move on to bigger and more complex financial planning. You can really compare it to anything

01:01
in life, any skill. As a lot of listeners may know, or everyone here knows, my daughter is super into softball. So take it back to something like that. You can't just start with getting on the field and hitting, right? You have to spend countless hours on the tee. Tee work isn't a glamorous thing, but it's a basic building block to being able to hit successfully in live games. And budgets are something like that. In terms of financial planning, you need a strong foundation before you can go ahead and build on it.

01:31
One of the other things budgets provide are — a personal accountability, and they give you some control. So if you don't actually sit down and think about it, you don't even realize that you're overspending. You know, you might not be… you might have a cash surplus every month and think you're doing fine, whereas really you're spending a lot of money on things that you don't want to be spending money on. And a budget, and reviewing a budget, will give you a picture of where you're going wrong.

01:54
Budgeting gives you a plan to reach your long-term goals. Obviously it doesn't guarantee that you're going to get them, but it gives you a plan so that you have a way to get there. And you know that there are steps you need to be taking to accomplish that.

Amy Laburda
That makes a lot of sense. So if someone has, up until now, done without a budget, or if they had a good enough budget, as you said, they know that they're taking in more than they spend and they're like, “Cool.”

02:15
But now they're getting further in their careers. They maybe have a more complicated life situation with a spouse or children, and they want to build something that works better for them as they've gone on.

02:25
How do they get started with the budgeting exercise?

Rebecca Pavese
Yeah, so budgeting, like everything, is going to look a little bit different for everyone because everyone's financial life looks a little bit different. You're going to see people that are budgeting really because they're struggling to make ends meet every month, and some people are doing it because they're just not reaching their goals. So it's kind of an ongoing give and take between spending and saving. So when you're sitting down to do it, you know, if you start big picture: Where are you? What is the current status of your financial health?

02:54
Are you just making it? Are you overspending? Are you running a deficit every month? Do you have a surplus? That will guide you into the next thing, right? And then it's: What are your financial goals in the short term and in the long term? You may have a very specific time-sensitive goal, like something has to be paid, or you're buying a house in six months and you need additional cash.

03:15
And in those situations, you could create a… kind of a micro budget. Something short term, because you can create a budget to reach a specific goal that isn't sustainable in the long term, but is sustainable for a short period of time. But overall in the general budgets, you're going to take those questions and then kind of roadmap out from there. And then once you have your goals, short and long term, and the, you know, the timeframe for them,

03:40
then you just need to sit back and figure out a budgeting system that works best for you and one that you'll follow.

Amy Laburda
So when you say a budgeting system, what specifically are you talking about?

Rebecca Pavese
There's two general high-level ways that you can budget. One is called the envelope method, and one is 50-30-20. And those numbers are percentages. It could really be anything. That's just a general one. So you could use some variation of that. In an envelope method, you start

04:04
at the beginning of the month, or whatever period you're looking at, and you're like, “OK, this is all the money that's coming in.” And then you set aside a different envelope for everything that you're going to spend. So you'd have an envelope for housing, you'd have an envelope for groceries or dining out or clothes, charity. You could get so detailed with them, or you could have just a few envelopes. And then if you run out of money in one category, you just don't have any. You can't spend anything else on that. So it limits you. And then at the end of the month,

04:32
if you have excess, you can decide, are you going to roll it over to the next month? You know, take something fun, right? If you had something in your dining out or your entertainment envelope, if you have it left at the end of the month, do you say, “Oh, I'm going to roll that over to next month? Or am I going to put that money in savings?” And then the percentage method, you know, here we're talking 50-30-20, that basically says, “I'm going to allocate 50% of my income to living expenses. I'm going to put 30% for discretionary spending and 20% to savings.” And like those numbers could be —

05:02
depending on your income, right? If you're like, “I can only save 10% and discretionary is going to be 20%.” It will work out, then the percentages will work out, but it's kind of big-picture like that.

Amy Laburda
So if you're talking to clients about budgeting,

05:13
do you generally recommend envelope versus percentage, or does it really just depend on the client's circumstances and their temperament?

Rebecca Pavese
It is highly dependent on temperament because there's just some people that are so detail-oriented that 50-30-20 is too broad for them. And then you have the opposite, that, you know, people that can't be specific enough, they just need a more general rule. So you have to go to temperament, which is also, when you choose how you're going to budget, will also dictate which way.

Amy Laburda
So,

05:38
our budgeter has decided on a framework. They sort of have their current spending habits in mind. They've sat down. They're ready to go. What next?

Rebecca Pavese
So then you actually have to decide, where are you going to do your budget? How are you going to do it? The tool that you're going to use to do it. And there's kind of two different ways, what we'll call the “pen and paper” way, which — we may have a few old-school clients that are actually still doing it on pen and paper. But when I say “pen and paper,” I'm mostly referring to like, a spreadsheet: so your Excel, a Google Sheet, a Numbers, something like that.

06:08
Or even when I say “pen and paper,” you might download a budgeting template. That would still be considered a pen-and-paper-type method. And you're just using that to track your income, you're tracking your spending, and then you're tracking your savings. You're doing it all manually. And then the other way would be — there's so many out there: budgeting apps. I'm going to avoid recommending a specific one, because I've not used many of them myself, so I don't want to guide anybody wrong. But you have to look at the apps and see what

06:37
suits your preferences. You're going to read reviews and make sure that you choose a reputable company. You're going to be putting a significant amount of financial information in them. Typically when you use an app, you're going to link it so that it's automatically syncing with your financial accounts, with your credit cards and your bank statements. So obviously, as we've known, you can't protect everything from being hacked, but you want to at least pick a company that is taking significant measures to protect you.

07:01
And also with the apps, you're going to have some that have a monthly fee and some that are free. You know, in the beginning, you might just want to try the free version. And then this is, we'll see in subscriptions and just budgeting in life in general, if you choose to use an app and you're paying for a subscription, make sure you're using the budgeting app. And then if you decide that it's it's not working for you anymore, that you actually cancel the subscription and you just don't let it continue to run in the background, not realizing that you're paying for something that you're not using, which when you're budgeting, if you're doing it, you'll catch things like that.

07:30
So yeah, those are the two main ways.

Amy Laburda
And I imagine most of the apps will, when you look into them, resemble one of those sort of envelope or percentage approaches. I know there's one in particular that I've encountered that actually has “envelope” in the name. So I'm sure that's pretty common too.

Rebecca Pavese
Exactly. They're both going to model off of the ways that you're doing it. It's just they're making it a little more automatic.

Amy Laburda
Makes sense. So we have a system, and we have the tools, either manual or automatic, depending on our temperament and what fits us best.

07:59
Now that we've done that, how do you start sort of plugging numbers in?

Rebecca Pavese
Yeah. So as I mentioned earlier, even when you're at this point, obviously you know you needed a budget. And now you're going to take a status check. Where are you? What are your short- and long-term goals specifically there? Do I have an emergency fund? Right. So that's the first thing, when we talk to people, that you want to set that up. But people might have other goals, right? They might say, “Well, I want to pay down my credit card balance because it has a high interest rate.” So you're trying to structure those and what's most important. And you know,

08:29
that's great that you want to pay down credit card debt, but you know, first get your emergency saving, because if you pay that credit card down and then you have nothing and something happens, well then you've just created the same cycle again. You're just going to have to tap back into that credit card. So once you've done that, you

08:42
see your goals and you'll make a plan of how to budget for them — remembering that these are fluid. This is just, you know, if you're just starting, this is just version one. And these are going to constantly change, as your life and financial health changes. But so yeah, you prioritize what's the most important thing and you kind of come up with a way to achieve that, and then you use that to guide you, OK? Like, well, this is what I can spend. This is how much I need to save. This is how much I need to pay down my credit card. And you try to set goals to budget to avoid taking on new debt, right?

09:10
So let's say if, every month you're kind of running neutral, you're putting a little bit into savings, but you know 18 months from now you're taking a very nice European trip, and there's going to be airfare and hotel and travel. You're not going to be able to pay for that in one month. You know that based on your income. So what you need to do is plan ahead for that, right? Budget that. Say, “OK, I'm taking this big trip and I'm going to need $5,000. How much do I need to put aside every month for the next 18 months so that I can have

09:36
the money that I need to pay for that trip without, you know, taking it out of savings or putting it on a credit card.” And sometimes it's just a timing thing, right? Sometimes you're going to have months where you spend more, right? Take, for example, for me, I travel significantly more in the summer than I do at any other time of the year. So I'm going to run a surplus early on in the year and put some of that extra money away, and then use that money in the months when I'm, you know, then running a deficit. But it's not actually going to impact the savings, because I've accounted for that earlier on in the year.

Amy Laburda 10:05
Yeah, I'm sure everyone is aware, as we bring up emergency funds, if you have a car, those expenses can crop up unexpectedly. Obviously health expenses, that kind of thing too. So you're balancing those, “Oh, I can plan for this coming up” expenses with those ones that really do blindside you. For listeners who are more interested in building emergency funds, we're going to go into that in more detail with our colleague Thomas Walsh in an upcoming episode. So they should check that out. I won't

10:32
press you too much about them right now, so we're not doubling up. But I think the emergency fund does seem like a really critical point to touch first before we move on.

Rebecca Pavese
And budgeting is also — like everything in life — is about choices, right? If you want to retire at 50, you have to save a lot more early on. Then you're like, “I

10:49
actually like my job, I like working, I'm going to retire at 60 or 70,” you have a lot more time, right? So you can spend a little bit more each month. And you know, it's like, “Do I want to travel? Do I want to spend it on clothes?” There are choices here. And so you just have to think about it and make choices that you want to… are happy living with. Right?

Amy Laburda
Yeah. It makes me think of, some of our listeners may have heard of the FIRE movement: Financial Independence, Retire Early. For people who really, I think, put an extreme face on that. Living in extremely austere

11:17
budgeting in their younger working life, with the idea of retiring early in a sustainable way, which I think is certainly a thing that one can prioritize, but it really is a more extreme version than I think a lot of people are willing to pursue.

Rebecca Pavese
For sure. That's one extreme, and the other is spending all your money and working until you die, right? No one wants to do that either. But there are endless options, but it's all about choosing, and choosing what's important to you, in a way that you'll follow your own budget.

Amy Laburda 11:46
So I think to that point, as you're thinking about what you can live with, if you're making a budget with a big goal such as homeownership or a wedding or a big vacation, how can you tell how much of your budget you should be allocating to that goal every month? Is there some sort of litmus test you can use, or are there other factors you should be considering when you're deciding how much to allocate?

Rebecca Pavese 12:06
I don't think there's so much [of] a litmus test that you can use, but it's just a matter of going back and monitoring your budget, looking at every few months to see if the budget that you created is making progress towards the goal. And if it's not, can you change it? Is there something that you have flexibility, or was the timeline and the goal too strict, that it needs — the goal itself needs to be reevaluated? So… And reviewing the budget gives you that information. It's one of those things… don't give up on the budget. Sometimes you may have a goal and you're like, “I'm not making as [much] progress as quickly as I want to.” Some of these things

12:36
just take time. So you may just need to give it more time. And if it's a big goal that led you to make a budget like that — you're making progress right there, right? If you set a goal and that caused you to create the budget, like you're halfway there, almost. That's such a big step, because it'll keep you conscious of what you need to do to reach that goal. And less about budgeting, but more about savings, you should always remember too, that you should pay yourself a little bit every month. So an easy way to accomplish this is to automate your savings. And that'll work into your budgeting, but

13:06
it's kind of a separate point.

Amy Laburda
Yeah. I think it ties into the idea of sort of removing the pain of having to withhold it from yourself. If it never hits your checking account, I think psychologically for a lot of people, it's easier to not miss it, if you aren't just, like, trying to willpower yourself through having this much at the end of the month.

Rebecca Pavese
Exactly. A lot of people just have it set up automatically, either to come out the day they get their paychecks or they even have it coming directly out of their paycheck, either to a retirement account or to a separate savings account.

Amy Laburda 13:32
So I'm a millennial, and I'm sure that I'm not the only one who's sick of avocado toast jokes. Thankfully, they seem to be passing on from our media landscape. But even so, people of all ages, not just millennials, I think sometimes have the impression that when a financial professional talks about budgeting, what they're talking about is restricting yourself, is about giving up things you enjoy, is about sort of buckling down.

13:56
But it sounds like, from our discussion so far, that budgeting really isn't about self-denial. You might choose to trade off things, but it's not about, just like, never have fun, put your money away. Is that a fair characterization of what we've said so far?

Rebecca Pavese
Yeah, that's absolutely fair. Budgeting isn't about self-denial. It's about taking stock of your current financial health and making choices.

14:19
All budgets will have room for indulgences. When you're doing it, you'll decide what is the appropriate indulgence that you want to budget for. You want a budget that can be sustainable. Think of it like a healthy lifestyle, right? Like if you're like, “I'm never going to eat bread” or “I'm never going to eat dessert.” You can't do that forever. It has to be generally healthy. Like “I'm going to eat healthy most of the time, and I'm going to have some of these things.” The budget is very similar to that, you know,

14:45
for success. And sometimes when you plan for these things, if you're like, “OK, I'm allocating this to, like, brunch on Sundays,” or “I'm going to go get Starbucks” — it makes them more enjoyable because it takes out the guilt. You don't have to think like, “Oh, I got Starbucks again. Should I have done that? Shouldn't I have done that?” It's a fine line, though, self-denial and being smart. So let's not confuse avocado toast and Starbucks with bad choices. So you can have those things, and you plan on your budget, and it's “what is it that I can afford?” And [you]

15:15
consciously do that. It's not being like, “I'm going to get Uber Eats every day for lunch and I'm going to eat out every night and never cook.” That's giving yourself everything that you want, and that is not sustainable, and also not budgeting. So budgeting is, I'm going to, you know, we used the example earlier about going to brunch and you can absolutely do that and you can absolutely plan for that. But let's just be conscious that giving yourself a treat is not necessarily an everyday thing, and that it's about choices.

Amy Laburda 15:42
I think I can say from my own life, I certainly have felt this. And, you know, I won't say that everyone's is going to be the same as mine, but I live in New York City and I love live theater. And as anyone who has visited or lives here knows, it can get pricey. But I think setting a certain amount of my budget aside to theater tickets has let me feel really good about when I buy a ticket, I know it's in my budget. I know it's a thing I've planned for and that I'll really enjoy.

16:08
Versus I think, when I was younger, there was always a sense of like, “Oh, is it responsible to buy this?” Like, have I bought too many? It's like whatever, versus now I'm like, “No, I've set aside this much.” And if I want to see a big headline show that's really expensive, I can do that and then just not see something else for a while, versus I can see several less expensive shows. But I sort of know going in, yeah, I've set this aside and this is for this so I can just enjoy it without feeling guilty or weird about it.

Rebecca Pavese
And that's exactly it.

16:38
So theater is important to you. So that's what you set aside money for in your discretionary part of your budget. Let's bring it back to avocado toast, right? If you're like, maybe you can't have both. Maybe you can't have a discretionary budget for a theater ticket and a discretionary budget for brunch every Sunday. So you need to make a choice about what's most important. And that's where it comes down to. It's not about self-denial. It's about choosing where you want to spend your money.

Amy Laburda
So listeners who've heard season one will

17:05
already be well aware that we have yet to find the mythical topic that “set it and forget it” works for. I assume that budgeting is not going to break our streak. So under that assumption, how often should you be revisiting and revising your budget?

Rebecca Pavese
Revisiting it quarterly in the beginning is probably a good place to start. That's giving you a gauge of whether it's accurate. Like, are you so far off from what you budgeted, or you are pretty close? Do you have more expenses or less expenses? So that gives you a gauge of

17:33
whether it's accurate or not. You're not really changing your goals in that short of a time, but you are checking to see if the budget is accurate, which will then let you reframe it if it's not. And then after that, you want to revisit it annually to make sure that you're making progress towards your goals and to see that your goals are the same. And then of course you have to revisit it if there's a big life change, right? So it could be marriage or death or having kids or changing jobs or getting

17:56
a promotion and having more income, or if you've got a windfall of an inheritance: all those things change your financial health. So you need to reevaluate your budget for those items.

Amy Laburda
So as a financial planner, we touched earlier on the importance of temperament in budgeting. Have you seen any particular challenges that people face when it comes to either making a workable budget or sticking to their budget once they make it?

Rebecca Pavese
The biggest challenge is actually getting — before the budget is made, it's getting people to realize that they need to make a budget.

18:25
And part of that is just education, and letting them know that it's why it's important and that they should do it. And then you… probably the people that need the budget the most, there's, you know, there's different reasons — either they're almost too embarrassed to sit down and look at their finances and actually deal with their problem, or they're in denial that they need one. That's the biggest hurdle. And sticking to a budget is actually probably the hardest during financially tough times, when you probably need it the most. So you need to accept that that's going to be hard

18:54
and consciously choose the hard, right? You want to stay disciplined in those times and stick to it.

Amy Laburda
Yeah. And I imagine for people working with a financial adviser, leaning on their adviser might be a helpful thing with that, as far as just accountability and someone to check in with.

Rebecca Pavese
Absolutely. Financial advisers are always going to be there to help you in the good and the bad times, and remind you of some of the core principles.

Amy Laburda 19:18
So let's shift gears slightly. As I said at the beginning of the podcast, your chapter wasn't only about budgeting, but is also about credit. I think many people first encounter their credit scores either because they're renting their first apartment or buying their first car, early milestones in many people's financial lives. But unfortunately, even though they're early, some people may discover they've already hurt their credit before they even knew really what it was or how they were doing that. So let's just back up to the very beginning and start with some basics.

19:48
Why does your credit score matter?

Rebecca Pavese
The credit score matters because it impacts so many other parts of your financial life, right? I mean, you mentioned it, right? It's going to come up if you're looking for your first apartment. A lot of landlords are looking to see if your credit score is… what it is, to see that you qualify. It's going to impact you qualifying for credit cards,

20:09
a mortgage, car loans. And then if you do qualify for those things, it's going to impact the interest rates that's charged on those. It could impact the rates that insurance companies charge. So it just impacts so many other things, which is why it's essential that you care about your credit score.

Amy Laburda
So if you're starting to care about your credit score, I think there can be a lot of mystery or confusion around what does and doesn't actually affect that number. So can you just walk us through: What are the factors in play when your credit score is being?

Rebecca Pavese 20:37
Yeah, so your main score is your FICO credit score, and that score is based on five different items. The first is a history of paying your bills on time. And this includes not just your loan bills, like your utilities can sometimes get picked up on here, your credit cards, all your bills, your rent, not necessarily just things that you applied for credit for. How much available credit is in use on your cards. The length of your credit history.

21:03
The mix of accounts, and how recently new accounts are opening. Are you like… keep applying for credit? But also note these are kind of a little bit of a mystery formula. These aren't all weighted equally, but they all go into creating your FICO score.

Amy Laburda
I remember the first time I checked my credit reports from the three major agencies. I was really surprised that there was no place on that report where the score was. There's no place that says “this is your score.” How are you supposed to know what your score is?

Rebecca Pavese 21:32
Yeah, so if you want your actual FICO score, you have to pay for it. Doesn't come up in the three free annual reports. You can get an estimate from other websites, like Credit Karma. They'll give you a number that is not exactly your FICO score, but it's going to be close enough if you're looking to use that score for something. Some credit card companies actually offer that as a perk. They'll give you your FICO score. And there's also a relatively new score called the VantageScore, which is a competing but similar credit scoring model,

22:02
and it would also estimate about what your FICO score would be.

Amy Laburda
OK, so if your credit reports don't have your credit score on them, you can still get them for free once a year. Why is it important to check on them when you're able?

Rebecca Pavese
Yeah, the most important reason to check on your credit is for fraud or suspicious activity. You want to look at those often, because the earlier you catch something like that, it's going to be a lot easier to fix.

22:26
So suspicious activity would be an account or an address that you don't recognize, or maybe you'll see that someone had tried to apply for credit five times, and you know that you haven't applied for credit at all in the last year. So you would then find out where your information was leaked and try to fix those problems. It's much easier to fix it as soon as you see it. And so by checking it often, it's going to be very helpful in that situation.

Amy Laburda
I know there are three major agencies you can check with.

22:54
Do you tend to recommend that people check all of them together, like you have a little time to check your credit moment in your calendar? Or do you recommend that they stagger them throughout the calendar year?

Rebecca Pavese
Because I want you to check your credit often to make sure there's no fraud on your account, I would say to spread them out. Check it three times, separate times, a year to get three free ones and you'll be able to see. One of the other things you could do, you can freeze and unfreeze your credit account. That protects it,

23:22
but know that if you do freeze it, before you apply for credit or go out and do anything, remember to unfreeze it. And you could also put a fraud alert on your credit, and that will in theory alert you if there is fraud on your account.

Amy Laburda
So say none of that is, luckily, applying to you. Your credit reports are all totally accurate, but even so when you get an estimate from your credit card or Credit Karma or wherever, you're really not where you want to be with your credit score yet.

23:48
What's some advice you could give to someone who's looking to build their credit score into a healthier place?

Rebecca Pavese
Right. So the only way to increase your credit score is to make improvement on those five factors that we talked about earlier. So make sure you're paying all your bills on time. Set as much as you can for automatic payment. Make sure everything is getting paid on time. Don't keep applying for credit. If you're in a store and they're like, “Do you want credit because you can save 20% today?” Don't do that all the time, unless it's a card you're really going to use.

24:15
Don't hold all these credit cards in your pocket. Find one or two that you're going to use and do that. And keep your oldest card open. I actually have a credit card open that I don't even actually use, but it was my oldest credit card. It was my college credit card, and I've just kept that open because of [the] length of history. So you want to keep something like that open. And because I never use it, it never is showing a high utilization. Keep an eye on your utilization. So credit card companies like when you use only about 30% of the available credit that they give you.

24:45
And if you have a low credit [limit], and know that that credit … you think the credit should be higher, but they haven't raised it, just make multiple payments per month to keep that number low. So if you, let's use a small number, right: You have $1,000 on your credit card and you put $300 on it. You're like, “Oh, I want to spend another $700 and I have the cash.” Just go ahead and make a payment on it as soon as you put the charge on. And then there is

25:06
one smaller thing, and this is more helpful for younger people, but you could do it older as well, is to be added as an authorized user on your parent's credit card. That'll help build some early credit for you.

Amy Laburda
Yeah, I can say that. That was a thing my parents did for me when I was in my early 20s, and it was certainly helpful. Obviously, your relationship with your parents is going to matter a lot, because it's a big gesture of trust. But it's one thing that I found super helpful for sure, since it worked for me.

Rebecca Pavese
Yeah, absolutely. I mean, I had the same benefit when I was

25:36
young, and now — and actually my oldest is in college, and I've given her the same thing. She's used it responsibly. She has our trust and it's also setting her up.

Amy Laburda
So if you get married and your spouse has much better credit than you or, conversely, much worse credit than you, is that going to affect your score in any way?

Rebecca Pavese
It won't affect it automatically. It won't have any impact, except then if you start to open joint accounts together, then that will affect both of your credits. And then if you apply for a mortgage or something together,

26:04
it will look at both of your credit scores.

Amy Laburda
Yeah, so at that point, if one of you has much worse credit than the other, I imagine you might want to take some time to try and improve that before you're locking in a mortgage rate.

Rebecca Pavese
Exactly. Or if that person will be able to qualify on their own, you'd want to just apply in their name.

Amy Laburda
Makes sense. So we're talking about credit and we've touched on the factors that affect it, but I wondered if we might just home in on credit cards specifically, because it feels like they're kind of a specific case within credit more broadly.

26:32
A lot of people really struggle with credit card debt, either because they made genuine mistakes in their spending or because of things like, as we mentioned before, medical bills that can come up before you've been able to build up that emergency savings cushion. I think for a lot of people, there can be a lot of shame around carrying a large credit card balance, and they balloon so quickly with high interest rates that it can feel like it gets out of control really fast. As I said, we're talking with Thomas soon about debt in more detail, but with credit cards specifically,

27:01
do you think that there are particular pitfalls people should be aware of compared to other kinds of debt?

Rebecca Pavese
Credit cards differ from other types of debt because there's no related asset. A car loan has a car, a mortgage has a house, but credit card debt is primarily just everyday spending, right? You're spending it on consumables. So you have nothing to show for it at the end, while you're racking up all this debt. And it's something that just needs to be educated, right? You have to keep people from

27:25
creating the credit card debt before they do. And then if they do do it, which is kind of beyond the scope of this conversation, there are ways out there to help consumer spending and credit card debt. But you need to deal with it as soon as possible rather than pushing it off. And you need to be super responsible with credit cards and know that you have to pay them off every month. That should really be the mindset, that anything that's going on your credit card is something that you can pay off every month. You spoke earlier about the medical expenses,

27:52
and this is the type of thing that people may default to putting on their credit card, but you'd be much better served by dealing directly with the medical facility and not charging those. Not even letting them know you have that credit card as an option, per se, and make a monthly plan with them, rather than a credit card company, is a much better financial space for you to be in than putting that bill on your credit card.

Amy Laburda
Yeah. So it sounds like what you're saying is really there are other options than credit card and

28:18
pretty much all of them are better, if you aren't going to be able to pay it off.

Rebecca Pavese
Absolutely.

Amy Laburda
Now that we've talked about the hazards of credit cards, on the other hand, a lot of credit cards do offer benefits like cash back or travel rewards, even purchase protection, some level of coverage for rental cars. There are all kinds of things that are there to tempt you to open a credit card. If you are in a position to pay them off every month and you're not in immediate danger of getting into debt, can those sort of benefits be

28:48
worth pursuing in your financial life?

Rebecca Pavese
Absolutely. A lot of those are free benefits. So if you can use a card responsibly, why not have those benefits? In addition to the rewards that you see, either cash back rewards or company specific, you know, Marriott or Disney, if you're going to use those rewards, those are great. But there's other things that come with it, such as purchase protection. If you buy something and it has a problem, you can dispute an incorrect charge. It's a lot easier with a credit card company. We actually recently saw this example:

29:17
A client paid for a very large moving expense out of their bank account. They had it directly debited from their bank account for about $26,000. And then the company automatically debited the same amount again, overdrawing the account, because there wasn't supposed to be two $26,000 charges, which we were able to fund with other money. But it took them almost 10 days to put those funds back in the account. Whereas if that had been on a credit card, you would have just disputed that charge and there would have been no fight. The credit would have been taken back.

29:47
So there are advantages for things like that too.

Amy Laburda
Wow, that is a crazy story. And I'm sure I'm not the only one who felt a little secondhand anxiety about that particular situation. But I think that then brings me to the question of… A lot of people already have credit cards. We've mentioned a lot of things already with the purchase protection, the customer service available to you on the card.

30:11
Are there other things you should check and see if your card has? Are there other things to sort of look out for as benefits many cards offer?

Rebecca Pavese
There's a lot of credit card perks, and we even mentioned one of them earlier. Does your credit card offer you a free FICO score? Does it actually give you your FICO score without paying for it? But then there's other things such as rental car collision. Most of our credit card companies have rental car collision insurance, so you don't have to buy it separately through the rental car company. You'll also find out… Some of your credit card

30:38
companies are going to be better for traveling abroad with foreign transaction fees. Do they charge them or do they waive them? So you want to consider those things, especially if you travel internationally, but those are just free perks. So make sure that you're using all the benefits that your cards provide you. One of the other things, some of these cards that have a lot of perks also come with annual fees. Generally, if you can, you want to avoid a card with an annual fee, but sometimes the fee is worth paying because the benefits are significantly greater

31:07
than the fee. You just want to do that mathematical calculation to find out, “Am I getting benefits in excess of the fee?” And if you are, then there's no issue with paying the fee. You just want to make sure that it actually works out.

Amy Laburda
So it sounds like that actually would be a thing in your budgeting exercise, along with your many other streaming subscriptions and your gym membership, just checking in that you're still using the things that you're paying for all the time.

Rebecca Pavese
Exactly.

Amy Laburda
Zooming sort of all the way back out to

31:33
the, I guess, thesis of your chapter. We talked earlier about why it's so important to have budgets and credit right up front in our book. Now, we're going to be talking about a lot of the complex topics in the book later this season, but in your experience, are some people sort of dismissive of the foundational building blocks of budget and credit? And if they were, what would you say to sort of counter their idea that this is kind of the small potatoes of financial planning?

Rebecca Pavese
For sure you’re going to find people that think budgeting is

32:02
too basic and they don't need to deal with it. That their goals are too big for that. This question makes me think of the book “Atomic Habits” by James Clear. I listened to his audiobook and I'm actually recently reading the hard copy of it, but it's based on the premise that tiny behaviors can lead to remarkable results. Budgeting and monitoring your credit are very tiny behaviors, or small potatoes referring to your question, but the results will be anything but. These are the things you need to deal with to get very good results.

Amy Laburda 32:31
So kind of the eating your vegetables and exercising of your financial life?

Rebecca Pavese
Exactly.

Amy Laburda
I always like to give the guests the chance to have the last word in our conversations. So we've covered a lot of ground today. But do you have any other last thoughts about budgeting or building credit or both that we haven't already touched on?

Rebecca Pavese
Because these topics are basic, I want to remind people here to keep it simple. These are the fundamentals of your overall financial health. So do them, maintain them, and you'll be in good shape.

Amy Laburda 32:59
Rebecca, thank you so much for sitting down with me today. I think this is, especially, an episode that can really be of use to everyone. So I hope our listeners enjoyed our conversation as much as I did.

Rebecca Pavese
It was a pleasure to be here. Thanks, Amy.

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“Something Personal” is a production of Palisades Hudson Financial Group, a financial planning and investment firm headquartered in South Florida. Our other offices are in Atlanta; Austin; the Portland, Oregon metropolitan area; and the New York City metro area. “Something Personal” is hosted by me, Amy Laburda. Our producers are Ali Elkin and Joseph Ranghelli. Joseph Ranghelli is also our director, editor and mixer. Our firm has written two books:

33:41
Looking Ahead: Life, Family, Wealth and Business After 55 and The High Achiever's Guide to Wealth, which offers advice for younger professionals, entrepreneurs, athletes and performers. Both books are available on Amazon, in paperback and as e-books.