Smart Money Podcast: Procrastination, and Paying Student Loans vs. Investing

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.

Sara Rathner: And I'm Sara Rathner, filling in for Sean Pyles. If you want to contact the Nerds, call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD. Or email us at [email protected].

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Sara: This episode, Liz and I answer a listener's question about saving for retirement versus paying off student loans. But first, in our This Week in Your Money segment, Liz and I are talking about how to stop procrastinating and get those big money tasks done.

Liz: Sara, you wrote about this a few weeks ago, and I love how you identified right off the bat what causes a lot of money procrastination. Why do we do this to ourselves?

Sara: The big thing is fear. Yeah, you're afraid of making the wrong choice. It's not like, if you buy a T-shirt and then you try it on once it comes to your house and the color is not flattering, you can exchange the shirt or return it for a refund. That's a low-risk decision. But anything that involves moving money around or opening a new account or anything like that can really bring up a lot of fear because if you make the wrong choice, well, is it going to cost you anything? Are you going to lose out on anything? Are you going to be able to reverse your decision? It's really scary.

Liz: Yeah, it is. I think we tend to fear regret more than we look forward to the payoff. So not doing anything feels like it basically is going to avoid regret, but it does come with the cost, right?

Sara: Absolutely. Time equals money. And so any amount of delay can potentially cost you. And this can kind of play out in a couple of different ways. So when you talk about investing, you always talk about time being money and time in the market being really important. So if you miss out because you put off investing for the first time for, say, three years, then you're potentially missing out on three years in the market of your money being able to grow, and then your interest earning interest in the years after that. And you also might be paying fees on an account that you've had for a long time. You might not know how much it's costing you to maintain that account. And just by switching to another similar account, you'd save a lot of money that way. But the longer you wait to do this, the more you're paying.

Liz: So one of the things that I was really procrastinating on was doing some estate planning work. I mean, we had our wills and trusts and all that, but I was delaying looking at our beneficiaries and making sure everything was up to date. And that's not a good thing, I know.

Sara: Certain things, like beneficiaries, operate outside of your will. If you, for example, have an ex-spouse as a beneficiary, and then you get remarried, if something happens to you, even if your new spouse is in your will as getting certain assets, they're not going to get the account that you wanted them to be a beneficiary on because you never bothered to change it. So your ex-spouse is getting your money. So you should always review that at least every couple of years or whenever you have a big life change.

Liz: Yeah. And even if there isn't a change, because we had this issue with our daughter, we had one person as her guardian. We wanted her to be with a family member when she was younger. As she got older, it became clear that we'd want her to stay where she is if something should happen to us. So we needed to name a friend, somebody that was nearby so she could stay in our house. And I put that stupid change off for months. And finally it was like, she's going to be no longer a minor by the time I get around to this.

Sara: Yeah, I mean, your situation, your life situation can change so rapidly, but it also changes very subtly over the years. And so it's always good to periodically look into how your money is structured and make sure that it's currently going to where you want it to go, and should something ever happen to you, it will continue to go to the people that you want it to go to. And that's really, I mean it's so morbid to talk about, but it really is an incredible gift to the people that you love to make all of these things clear.

Liz: Yes, absolutely. So what about you, Sara? What is something that you put off?

Sara: Oh man. You know what's like the worst thing ever, is rolling an old 401(k) into a new retirement account. The worst. Oh man. So I mean, I've had a number of jobs in my life. And so with each of them is another retirement account. Eventually I just kind of wanted to consolidate the old jobs into one so I didn't have to keep an eye on things and keep paying the fees on multiple accounts and all that. So, each fund company has a different way of doing this. Some of them have electronic transfer. Some of them mail you a check. They literally overnight you a really large check, which is scary. And then you have to turn around and fill out a bunch of paperwork, get it notarized, which is like a whole thing. It's not, but I mean, it's not free and you have to find a notary and I don't know. It's just another barrier. And then you get to drop this massive check in the mail and just keep your fingers crossed that it arrives. So it's not a pleasant process.

Liz: Amen. Amen. But you got it done. That's the important thing.

Sara: Well, I've gotten this done more than once, so I can't say I'm an expert now, but I could at very least be a supportive shoulder to lean on metaphorically if you were going through the process.

Liz: So let's talk about how do we kick this habit? How do we stop procrastinating on these important money tasks?

Sara: The big one is knowing why something is actually a task. So if you have this running to-do list and you ignore it, and it's getting kind of long because every couple of months you think of another thing you want to do, actually take a look at the list and ask why is each item here? And if you can't think of a reason, just cross it off. Just deprioritize it. Put your effort into things that actually matter to you. Because once you do that, if you cut that list in half, it suddenly becomes so much more manageable.

Liz: So I think breaking down the big tasks into smaller ones can help as well, right?

Sara: Yeah. If you have a huge, vague goal, you're never going to do it. If you're like, oh, my goal this year is to start investing. Okay. Yeah. Great. Where do you even begin with that? Because I mean, I have been working in the financial world for a long time, and it was even like pulling out my own teeth to start investing. Because you're like, OK, well, which brokerage account do I pick? How much money do I put in? What do I invest in? I don't know.

Do I need to talk to somebody? Can I do this myself? How much is this going to cost me? You have all of these questions. So if you take this big goal, and you just make it into these little bite-sized pieces, like today, I am going to evaluate three different brokerage accounts. I'm going to see how much they charge every time I make a transaction. I'm going to see how easy it is to navigate their website, whether or not they have an app I can use so I can sort of invest on the fly, and whichever one meets my parameters is the one I'm going to open an account with. And that's like, decision No. 1.

Liz: And you can come to NerdWallet. We've done a lot of this work for you. We've evaluated a lot of different options.

Sara: Yeah. Evaluating 100 options means you're never going to make any progress. But if you can just look at like three to five, and you can look on NerdWallet, and just three to five, based on a couple of different rules that you're basically setting for the account, that becomes way easier than evaluating all of the options that are out there because there are thousands.

Liz: And this is really helpful to me, as well, because I can really go down a rabbit hole of research and just keep researching and researching and researching.

Sara: Yeah, you don't want to get stuck in this phase because you can justify basically researching forever.

Liz: I hear that. If anybody wants to read this excellent article, you can find it on the NerdWallet site. It's titled, “How to Finally Tackle Tough Money Tasks” by Sara Rathner. Let's get to this episode's money question, which comes from Jasmine in Michigan. Here's the question.

Jasmine: Hi, my name is Jasmine. I'm from Michigan. I'm wondering whether it's a better idea to put money in a 401(k) or to put money toward paying off student loan debt? How do you suggest making those kinds of calculations and decisions. OK, bye.

Liz: So Sara, with the caveat that we're not giving individual financial advice, what's your take?

Sara: It's extremely common for people to have multiple financial goals at the same time. But when it comes to deciding whether to save or invest or pay off debt, you often will be doing all of those things at once. It's not a question of which one should I do first. It's a question of how can I do all of these things at the same time?

Liz: I think we have this idea that we'll do better if we do one thing and just give all to it and then switch on to the next thing. But when it comes to saving for retirement, especially, time is money, right?

Sara: Absolutely. That's how compound interest works. You need time. Because if not, you're not going to get those really big gains on your investments. When you think about how compound interest works, it's literally interest on interest. But if you don't give time to that equation, you don't get the interest on interest on interest on interest and so on. And that's where you make money on your investments. That's where you start to build that huge nest egg that you're going to need to live on when you're retired.

Liz: When I talk to groups about this, I usually use the example of, let's say I give you a penny and I promise to double it every day for a month. So how much money do you think you'd have at the end? And I get answers all over the place. The highest is often $500. Sometimes people go out and say, OK, it's $5,000. It's actually $10 million. And what happens is you don't see much difference as you go along, and then toward the end, those gains on those gains on those gains really take off. So that's why we tell people, start in your 20s, start with your first job if you possibly can, because you really can't make up for that lost time.

Sara: You really can't. And it's really hard to play catch-up if you wait to begin investing or saving for retirement. If you start at the age of, say 25, you can save less per month toward retirement and end up with more money than if you waited until you were 35 or 45, because then suddenly to earn the same amount of money — let's say your goal is $2 million saved for retirement — it's going to take you a much higher monthly savings rate at the age of 45 if you're starting from nothing to hit that $2 million goal. That's another way that compound interest can work in your favor or work against you. If you have the opportunity to begin saving as early as you can, today is always a great day to get started.

Liz: Really good points. And we haven't even talked about company matches or the tax breaks, which are really use it or lose it.

Sara: Yeah, those can be huge if your company provides them. Not everyone, not every American worker, has access to an employer-sponsored retirement account, which means not everybody gets to take full advantage of some of the things that these types of accounts can offer. But if they are offered to you, you should definitely consider it because by contributing, you pay fewer taxes because the money that you contribute to your 401(k) is taken out of your taxable income. So that just means that you're taxed on a lower amount of money so you save money in that way. And that money grows tax-free over decades. So the gains are that much bigger. Also, you can potentially get a match from your employer. Some employers will match your contributions up to a certain amount. Let's say, they'll match dollar for dollar up to 4% of your salary. It could be one example of what that might look like. And that's literally free money. It's very rare you get something for nothing, but that's something for nothing. And so those are three big advantages to saving for retirement through an employer.

Liz: And there's a lot of confusion about this, but anyone who has earned income can contribute to an IRA. That's something you can do on top of your 401(k). It might not be deductible, but you can certainly do it. If you don't have a workplace plan, then you can definitely contribute and deduct it at the same time. So that's something that people get confused about, but any brokerage, any discount brokerage, will help you open these accounts and get you started.

Sara: And if you're self-employed, which a lot of people are, there are also other ways to save for retirement, other types of accounts that may be tax-deductible, like a SEP IRA or a solo 401(k). So if you are self-employed, it could be worth talking to your accountant or a financial planner, something you probably have if you run your own business. It definitely helpful to call in the pros sometimes. And that's a conversation that's worth having to find out a little bit more about what might be the most appropriate way for you to save for retirement and potentially save on taxes at the same time.

Liz: So we've gone into why you wanted to be saving for retirement no matter what. How do you prioritize paying off student loans? How important is that?

Sara: It is important. You should definitely pay off your debts. That can be helpful when it comes to things like building credit, keeping your credit score healthy. But this year is a little bit different when it comes to student loans because of the pandemic. Federal student loans have been in forbearance and will continue to be in forbearance until October 1 of this year. Basically what that means is you are allowed to skip your monthly payments and you won't be charged interest. So this presents an opportunity. If you have multiple financial goals, suddenly you don't have to make those monthly student loan payments for the time being. That means that you can potentially put that money toward other things for now. This only applies to federal student loans. If you have private student loans, you do need to continue making payments on those.

Liz: But the pause in student loan interest is particularly important because by not making payments, you're not contributing to your debt. And a lot of times when you're in forbearance on a debt, the interest continues to pile up. In this case, that's not the case.

Sara: If you have sought any sort of pandemic assistance from other lenders, like your mortgage lender, for example, you might not have the same deal. You might still continue to build up interest, even though your lender's allowing you to skip a couple of months worth of payments until you're in a better situation. But that's not the case with federal student loans. This is an opportunity for anybody who has these loans, has been making monthly payments. Now you have a break from that, so that can help you replenish your emergency savings if you've had to spend that down this year, but also give you an opportunity to meet other financial goals too.

Liz: One thing people should keep in mind is that, any payments you send to a student loan lender, they're basically gone for good. That money is gone. You can't get it back in an emergency, whereas putting the money into an emergency fund or paying down credit card debt, both of those give you access to funds that you could use in an emergency.

Sara: Right. For example, your credit cards. A lot of times the best practice is not to turn to your credit cards when you're facing an emergency. But especially this year, your line of credit is potentially a source of emergency funding. It's not ideal, but it's definitely there for you if you need to tap into that money, if you need to take on a little bit of credit card debt to make ends meet, that's possible. You can continue to make minimum payments on that and keep your credit line intact, keep your credit score intact as well. And once you get another job, have another source of income, you could begin to start paying down those debts. Again, it's not ideal, but nothing's ideal right now for a lot of people. And sometimes you just have to do what you need to do to get through every day.

Liz: And a lot of people, even before the pandemic, had trouble with accumulating an emergency fund. There was an article in the New York Times that said a typical family could take up to two years to accumulate even one month's worth of expenses. So it's not something that most people find easy to do. So if you have paid off that credit card debt and you have this extra money from not paying your student loans, emergency funds is a pretty good place to put it.

Sara: It can prevent you from having to take on debt in the future. I think we've all seen how bad things can get this year and how you might need to tap into that money. And having even six months worth of emergency funding might not be enough if there is a really unusual circumstance that is lasting month after month for you. At the same time, if you have a couple of months worth of living expenses set aside and you experienced an unexpected expense — large medical bills, car repairs, home repairs, your basement floods, you lose your job. — that's money that you can use to keep yourself afloat without having to turn to your credit cards first.

Liz: And we always like to say, it doesn't need to be thousands and thousands of dollars. There's been a study showing that as little as $250 can help a low-income family avoid serious setbacks like an eviction. Around $2,000 is the cost of the most expensive financial shock for most families. That was according to Pew Research. So shooting for a couple hundred dollars at first and then a couple thousand dollars and then moving on to the three to six months. It's OK to take this in chunks. You don't have to try to get to that three-month level right away.

Sara: And if you're younger, sometimes your life situation's a little bit less complicated. You don't necessarily own a home so you're not on the hook for the cost of repairs. Maybe you don't have children yet. You might not have pets yet. These are all things that bring a lot of joy to our lives, but they also sometimes bring unexpected expenses. And so, if you're first starting out, you're new to the workforce, obviously it might not be the highest-earning year you'll ever have — I hope not. I hope your income continues to go up as you keep working. And so if that's the case for you, it could be worth setting a pretty modest goal for your emergency funding. And then as you work your way up the career ladder, maybe get raises and promotions, you can continue to fund your emergency savings, because as you get older, your life just gets more complicated, and with complications come expense.

Liz: So we should talk a bit about how to balance all these different financial priorities, because we've just covered three: paying down debt, saving for retirement, dealing with emergency funds. People have a lot of other goals as well they're trying to meet. So how do you balance all these different priorities?

Sara: Different financial goals probably have different timelines. You might say that you want to buy a house in three years, you want to replace your car in five years, you want to send your oldest child to college in 10 years, you want to retire in 25 years. So you might be working toward them at the same time, but they're going to be on different time frames, which means you need to tackle them in slightly different ways. And so, while you're making your priority list, it's helpful to know, OK, I have 25 years to reach this goal. That does not mean that you slack on that goal for 25 years and then frantically start working toward it. It means that, as you work backward and figure out, well, how much do I need to set aside every month for goal A, goal B, goal C. The sooner your goal is, the more aggressively you're going to have to start saving for it because you just don't have that much time.

It also affects where you put your money to meet those goals, because if you have a goal that's five years or less from now, you're probably not going to want to invest that money in aggressive investments. So typically, you keep that money in a savings account. But then, a longer-term goal like retirement, that's why we put money into investment accounts, because you have several decades. I mean, that way you can take advantage of that compound interest in growth on your investments.

Liz: One thing that people get confused on is that when they're making plans for all these different goals, they probably will have to adjust the goal, either how much they save or how long it'll take, because we have limited resources. We can't do everything, right?

Sara: Yeah. And your life changes. If you have a goal that's for 10 years from now, let's say you're 22 years old, just getting started, and you want to buy a house. But you're going to move around a bunch as you're getting your career off the ground. I mean, I started saving a down payment in my early 20s. A little bit of money, I put away a little bit of money every month. And at 35 I bought a house. It was a long-term goal for me and it might be a long-term goal for somebody who's listening, as well. And so in that decade or more, your job changes, your salary changes, where you live might change. And then also, your timeline might change. Maybe suddenly it makes sense for you to buy a house at 27 instead of 32. Maybe you hit your 32nd birthday and you love being a renter, you don't want the responsibility of home ownership. You just want to live in a van and travel the country. That's cool. Then you have to buy the van.

That's why it's really important to allow for flexibility in your planning, because you don't know where your life is going to go. Hopefully it goes somewhere awesome. But that somewhere awesome might be something completely different than how you thought your life would be.

Liz: Yes.

You don't want to lock yourself into a certain life plan. And honestly, you don't want to lock yourself into a plan that somebody else might have for you. You definitely want to identify what's important to you, what your values are, and then put your money toward those values. And let your values change over time. That's totally fine.

Yeah. People think that they're not going to change. I think that's called the end of history illusion, that we have evolved as much as we're going to, and we're going to stay the same going forward. And everybody has this illusion. It's like, when you're a teenager or when you're 90, you think you're not going to change. And the reality is we do change. Lots of things change in our lives.

Sara: Yeah. That's something to look forward to. Just anticipate, how might I be different in five years? That's OK. And unexpected things happen too.

Liz: Like pandemics, for example.

Sara: Like pandemics. Or you might think you do want children, then you decide not to have them or you can't have them. You might decide you don't want children then you change your mind and have kids. That's a financial choice, too. So it totally changes your financial plan to make that choice. You want to leave something open in your life to change your life plan a little bit. Because if you don't, if you're too rigid in that, then you're not going to be serving yourself and your goals very well.

Liz: That is so true. You've got to leave some flexibility for your future self. OK? Well with that, let's get to our takeaway tips. Do you want to start us off, Sara?

Sara: Start saving for retirement now. By saving for retirement now, you can take advantage of your time horizon and compound interest.

Liz: Next, multitask. Save for retirement while paying off your debt and saving for emergencies.

Sara: Finally, put your debt in context. While it can be tempting to pay off your debt ASAP, this may not be the best use of your money, especially when it comes to student loans. And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and 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.

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 circumstance.