Smart Money Podcast: Taxes Are Due, and How to Get Started Creating Wealth

Liz Weston: Welcome to the NerdWallet's 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 your host, Liz Weston.

Sean Pyles: And I'm your other host, Sean Pyles. As always, be sure to send us your money questions. You can call or text us on the Nerd hotline at (901) 730-6373. That's (901) 730-NERD. Or you can email us at [email protected].

Liz: This episode, we're talking about how to build wealth with Arielle O'Shea, a Nerd who knows this stuff inside and out. But first, in our This Week in Your Money segment, Sean and I are talking about everyone's favorite subject, taxes.

Sean: Yeah, that's right. This part of the show goes out to all of the procrastinators out there. The deadline to file, that was extended by the CARES Act back in March, is coming up really fast on the 15th. So Liz and I wanted to talk about what this means for you and what you should begin thinking about for next year's taxes, especially if you're getting those unemployment benefits.

Liz: Yeah, I think a lot of people don't know that those unemployment benefits are taxable. That's going to be a really unpleasant surprise for a lot of people.

Sean: Yeah, yeah. That could be a really scary, big surprise tax bill, something that I've had in the past. Let me tell you, it's not very fun. But there's a pretty easy way to fix this. You can fill out a form that's called a W-4V. It's a voluntary withholding form to have part of your taxes withheld, or you can make quarterly payments to the IRS of the amount that you think that you'll owe. And of course, how much you owe will depend on your tax bracket. But if you do this gradually, you will make this so much easier on yourself, so that come 2021 in the spring, you don't end up owing a lot of money that might be hard to come by.

Liz: Yeah. Obviously, we're talking to people who have a little leeway who can do these things. There are people that don't have a penny to spare.

I did want to mention that if you need help with your taxes, there are free resources, including some run by the IRS. I don't think they're back up and running quite yet, but they will be at some point, like the VITA program and there's one for seniors as well. But you can get help either filing your taxes or dealing with the IRS. So that's really something to keep in mind.

Sean: Right. One thing I also wanted to add on is that folks should know that their CARES Act stimulus check, that up-to-$1,200 amount that many people got in the spring, is not subject to taxation. That's a common misconception. So if you got that, don't worry, you don't owe taxes on it.

Liz: The other question I get a lot about stimulus payments is, "Where is mine?" A lot of people did not receive theirs. The last we heard, there were 30 to 35 million payments that still hadn't been paid out. But we also heard that people were inadvertently throwing their payment away.

Sean: Oh, no.

Liz: Yeah. If they didn't use direct deposit for the last tax return they filed, then they were sent, say, a prepaid card and it came in a very sort of odd envelope. I guess it was meant to avoid detection by the bad guys, by people who would steal it. But it also kind of went under the radar of people that it was meant to help. So if that happened to you, you should be getting a follow-up letter saying, "Hey, you didn't activate your prepaid card," and then there will be information for how to fix this.

If there was another situation that you're dealing with, like you're waiting for your refund, you filed before the pandemic ever happened or you filed electronically and it got hung up, you got a message that there was a problem, you should know that the IRS is dealing with a backlog that could only be called apocalyptic. I mean, they at one point had 10 million pieces of unopened mail in trailers.

Sean: Jeez.

Liz: This happened because for a lot of reasons, but Congress has been cutting the IRS' budget for a decade. They cut basically 20% of its budget in inflation-adjusted terms, which means that it has 20% fewer people, even as the number of tax returns filed has gone up. Even as the tax law got more complicated. And they also had to get out all those stimulus checks on top of everything else. So this has been ... I hate to use the words "perfect storm," but here we are.

So there are a lot of people who have been waiting for their refunds, waiting for their stimulus checks, can't get ahold of a human being. So I wanted to say on our website and in the show notes, there is a story with all these phone numbers that you can try and these workarounds that if you have not gotten your stimulus, if you've not gotten your refund, maybe you can get some help if this is getting critical, which it is for a lot of people.

Sean: Right, because one thing that is a little bit frustrating with this whole process is that yeah, even though the IRS budget and staffing has been cut, they're still keeping track of people that have not filed on time. That is a big priority. So just because they are understaffed and underfunded, doesn't mean that they're not keeping track of these things. In fact, they're probably keeping really close attention to these things because that's how they get their money. So don't think that you can slip by unnoticed.

Liz: Yeah. Even though the tax deadline was extended to July 15th, you still have to pay at that point. Right, Sean?

Sean: Yeah, yeah. That's one thing to note. The filing deadline was pushed to July 15th in March. People who really, really can't file for one reason or another, or just love to procrastinate on these things, so they can file for an extension that will give them until October 15th to file their taxes. However, if you owe the IRS, you have to have your payment options sorted out by the July 15th deadline. There is no delay on that one way or another.

Liz: You either have to make the payment or you have to sign up for a payment plan, right?

Sean: Yeah. There are a few different payment options the IRS offers. One is a kind of regular payment plan. Something that I did way back in the day I've talked about. It's fairly straightforward. You just make regular payments over a course of several months until your balance is resolved.

There's also something called an offer in compromise, which is basically settling what you owe with the IRS. Historically, when I've written about this, I've basically said, "Yeah, there's an option here, but it's a long shot." I think that that's going to change this year because there are a lot of people who are in pretty severe financial straits and they're going to need more help like this. So if you really think that you can't pay what you owe, look into that offer in compromise. If you just want to pay off what you owe over the course of several months, the payment plan is probably the easiest option for you.

All right. Well, I think that about covers it for now. Let's get to this episode's money question, which comes from Eva. She says, "Hey Nerds, I'm a first-generation professional interested in building wealth. What investment strategies or education would you recommend that my parents did not teach me? Wealth creation is not something my parents practiced."

Liz: Whenever I hear these questions that mention their parents, I'm thinking, "Maybe you're better off that your parents didn't teach you, because the world has changed so much."

Sean: Yeah, that's a really good call. I can recommend one resource in terms of education. It's called NerdWallet.com.

Liz: Yeah, I've heard of that place.

Sean: So you're already on the right track by reaching out to us. Eva, you've totally come to the right place. On this episode of the podcast, we're talking with Arielle O'Shea, a Nerd who has a ton of experience with investing and wealth-building. So she's going to help answer your question for you.

Liz: All right. Let's get to it.

Hey, Arielle, welcome back to the show.

Arielle O'Shea: Hi, Liz. Hi, Sean. Thanks for having me back.

Sean: We are super-happy to have you. Our listener Eva is a first-generation professional and she's interested in building wealth, but isn't sure how to do it or what resources she should use to learn about building wealth. So to start, I'm wondering how you define quote, unquote, wealth.

Arielle: I think wealth is really about being financially comfortable. So in a lot of ways, that means to me that you don't really have to think about your money as much. I mean, I think that's kind of my definition of comfort. People who are not financially comfortable, people who are living paycheck to paycheck, they don't have enough money to really make ends meet. They're pretty much constantly thinking about money, and it's a real luxury to not have to do that. So that as well, to me.

Sean: Yeah, one thing I was thinking about is there's a saying that health is wealth. Financial health can be wealth in a way where you have a certain amount of savings, you're not super-bogged down by the debt that you have, and you can live your day-to-day life without really thinking about it all too much.

Arielle: I think that a lot of the systems that you can put in place to help you build wealth, these things like automatic transfers and those specific accounts that are going to allow you to invest and save that we can talk about a little bit, those are all sort of about getting the money out of your mind, too. So I think that's really helpful.

Liz: We talk about wealth all the time, and a lot of people think of that in terms of income. Like if they only had a six-figure income, everything would be better. Really, what we're talking about is assets. We're talking about the stuff that you own because that's what grows over time. That's what can throw off income of its own. And that's where most of our focus should be.

Sean: I want to talk about different strategies for building wealth. I think there are a few different ideas that I've seen floated out there. Building wealth through maybe flipping houses and real estate and doing all sorts of things that could be potentially risky. But also there are safer options like saving for retirement. So in terms of really simple practices to build wealth, what do you think would be one or two pretty straightforward ways to start building your wealth?

Arielle: Some of those more aggressive strategies that you mentioned, real estate, those sorts of things, those are things you get in when you already have a path established, you're already on your way to building wealth. Maybe you've already built it and that's really about maximizing it.

I think the first thing that people often overlook when they think about building wealth is spending, right? A lot of people think about saving, they think about investing. But really what's going to allow you to save and invest is making sure that you're spending a lot less than you earn. So getting your expenses down and making sure that you're staying out of high interest rate debt, those are the things that are going to allow you to then move on to start building wealth.

Liz: Yeah, that's such a basic step. They talk about paying yourself first, and that's basically getting your expenses down or getting enough of a gap between your expenses and your income, just as you were saying, Arielle. So you have the room to maneuver and do some other things.

Sean: Paying yourself first is such a simple and highly effective way to do this. For example, I had a hard time saving for awhile, but when I set up auto deposits of a big chunk of my paycheck into a savings account, it made it so that I didn't have that amount of cash in my checking account to spend on useless crap.

Being able to set that up for me was my first step in terms of being able to build wealth. I'm trying to find other ways to do that as well. Contributing to a robo-advisor account and upping the amount that I contribute annually to my retirement account. Things like this that are just easy habits to get into can make wealth-building automatic so it's not something that you have to think about.

Arielle: It's really important to think about savings as an expense, right? It's not negotiable. Assuming there are no extreme circumstances at play, which I know that there are right now, but in sort of more of a normal environment, your savings should be in your budget. It should be something just like a bill that you pay every month. And like we have been saying, you can make that happen automatically, just like bill pay. But it's not something that you get to the end of the month and you're like, "I have no money left to save because I spent it all." You want to make sure that savings goes into savings and into your investment accounts before you have a chance to spend it.

Liz: Talking about savings as a habit and something you just do, I think people get discouraged when they try to save and then they have a big expense and it wipes out their savings and they think, "Why even bother?" Actually, it's not a goal that you get to, it's something that you just do over and over. So like with your emergency fund, you'll build it up, you'll spend it down, you'll build it up, you'll spend it down. Once you get that gap between your spending and your income, you have the wiggle room to save for emergencies, but also save for longer-term projects. And if you do take a hit once in a while, you can build it back up.

Sean: This is why we really focus on the 50/30/20 budget where half your income goes towards needs like housing, 30% goes to wants, and 20% goes toward debt payments and savings. That way you have it automatically structured. So you can work to build your wealth and reduce the debt that you have over time so that you can focus on your other goals.

Arielle: The other suggestion that I would make to Eva is that you should take all the help that you can get with this, right? One of the biggest pieces of help that's available to people who have a 401(k), which is an employer plan or other type of employer-sponsored retirement plan, is matching dollars. Those can, in some cases, double what you're saving. They're going to match your contributions up to a limit. That's really money that you don't want to walk away from, and that's going to go a long way to helping you build wealth and helping boost those retirement accounts as much as possible.

Liz: This is kind of an aside, but Arielle, how did you get started with investing?

Arielle: It took me longer than I would like to admit to open a Roth IRA, but I did. I was probably 25, so not too long. But I was writing about money for a good three years at that point and just telling everyone to open Roth IRAs and sort of not really admitting to myself that I wasn't taking my advice.

In my defense, I lived in New York City. It was very expensive. I really had no money. And I didn't have an employer retirement plan at that time. Actually, I was offered one by my first job and I turned it down. And it had a match, which is another big regret of mine. But you can't go back.

Yeah, I mean, I've done a lot to try to make up for that little bit of lost time since then. I mean, I'm glad that I got educated and started taking those steps. In some ways, it's a little bit like ripping a band-aid off, right? It didn't take a major shift in my finances or my situation to open that Roth IRA, because it's not like I immediately started shoveling tons of money away. But I was saving ... I don't know, it was probably like $200 a month, and that sort of built some momentum that kept me going.

Sean: Well, that brings me to the other part of Eva's question, which was where to learn about building wealth. I think a great resource is learning from other people's mistakes. As the youngest kid in my family, I grew up learning from my siblings' mistakes and I found it to be a super-valuable source of information. We've all made financial mistakes. And so even having conversations with your parents about what they did and didn't do to manage their finances can be a really good source of information around where you can make different decisions. But there are all sorts of resources out there online, including nerdwallet.com, that can teach you how to build wealth.

I'm wondering, Liz and Arielle, if you guys have any go-to resources or sources of information around this that you would recommend to her.

Liz: I feel like I dissed parents when we started talking about this issue. Actually, I have to acknowledge, I got a lot of great instruction from my mother about money. She was the one that basically taught me to live below my means and always save and don't get into debt. So parents can be hugely important. If they don't have that information to pass on, you are kind of starting from a different starting line. You're starting a little bit later. You don't have the same advantages of somebody who did get that kind of education.

Right now, with Black Lives Matter and talking about the wealth inequality and the wealth gap, it's important to talk about that issue. That I did have a big head start, and it was because of my parents.

Arielle: I mean, I feel the same way. My parents gave me a very big advantage in talking to me about the downsides of debt and making it very clear that it wasn't something that they took on. And if we didn't have the money, we didn't spend it. I think that is a huge advantage.

But you need to listen to the good advice that you're given. I mean, I mentioned I didn't take advantage of my 401(k) at my first job. I actually called my brother, who had worked in the financial services industry a few years ahead of me, called him and asked him and he told me to do it. I just didn't listen. So I think if you're going to ask for advice, you're going to hear advice, you should try to take that advice as well as you can.

Liz: But it takes what it takes. People always talk about how they need to have personal finance education in high school, which they do. I think a lot of schools have that. The problem is you're just not ready to hear it at that point. Your hormones are going, you've got drama going on in the lunchroom. You've got no space to hear about mortgage rates. So it's like when you need the information is when you go and seek it out, which is why NerdWallet is so great. We've got tons of information.

Sean, you asked about resources. There are two books that I recommend to everybody. One is "Personal Finance For Dummies," which is Eric Tyson's book. It's been in print forever. And my friend Kathy Kristof has a great book called "Investing 101." Those are a couple of good ones to get started with.

Sean: I know that a lot of millennials feel like wealth-building is an impossibility because they're so saddled with student loan debt. Before I worked at NerdWallet and I learned a lot about this, I was in that camp as well. I didn't really have a lot of financial education growing up. It wasn't something that we really talked about as a family. So I assumed, "OK, I'll just be getting by forever and I'll be OK." That was in large part because of the student loans that I have. But that's not entirely true. It's not totally going to bog you down forever. I'm wondering what thoughts you guys might have around how people can still build wealth even if they do have a lot of debt.

Arielle: I still have student loans. They have very low interest rates. I pay them off on a slow repayment plan because I'm getting a lot more interest on my investments and that's where I would prefer to put my money. So I think it's a trade-off, right? Between the interest rate on your debt and the interest rate on your investments. A lot of times the interest rate on a debt is going to be a lot higher. But for me and the debt that I have and my student loans, I mean, I'm old enough to not have student loans anymore and I have chosen to pay them off slowly because the interest rate is so low.

Liz: Yeah, when I married my husband, he had student loans as well. I was in the "all debt is bad" camp and I was trying to get rid of them and talked to a financial planner. She mentioned that student loans are not the worst kind of debt to have. They're very flexible so that if you do lose your job or have another financial setback or the pandemic happens and you have federal student loans, you can get some breathing room. When you pay those down quickly, it might feel good to have the debt gone, but you can't get that money back. Once you've paid the lender, it's gone. So we did the same thing. We paid it off much slower than I probably would have before I talked to that financial planner.

Millennials in general, we've talked about this, Sean, you guys are just a snakebit generation. You've had everything go wrong. You had the Great Recession. You graduated into that. That puts you behind the eight ball in terms of income. You're not building wealth at the same rate that the boomers did. But I know that you are an incredibly resourceful, smart and savvy generation, and there are ways to build wealth regardless of what situation you happen to be in now.

Sean: Right, and no matter how much blame we're taking for our own circumstances that are pretty much out of our control.

Liz: Every boomer in the world should acknowledge when they were coming up, they had affordable health care, affordable housing and affordable education. Those three things are not present with the millennial generation.

Sean: Yeah, and that goes back to what you were mentioning earlier about the wealth gap in this country. There are some pretty significant structural issues that make building wealth a really difficult prospect for a lot of people. So that might mean supporting causes at a broad structural and national level that could increase the likelihood of wealth-building for different generations across class and race in this country. Because, as we all know, not everyone has the same opportunity to build wealth.

Arielle: Right. There's a reason they say the rich get richer.

Sean: All right. Well, I think that about covers it for now. Arielle, do you have any final thoughts or words of wisdom for Eva?

Arielle: No. I mean, I think I would just say that if you are young, Eva — and I don't know how old you are — it can be hard. There's a lot of things competing for your dollars. But you also have a big advantage, which is time. You're young. And even if you get started with a little bit of money, I mean, as little as $5 a week, you are building that momentum that I talked about earlier. That can help you sort of keep it up and add a little bit more over time. So it's really important to sort of work with what you have to get started.

Liz: Thank you so much, Arielle. That was great advice.

Arielle: Sure. Thank you for having me.

Liz: OK, and now on to our takeaway tips. Wealth-building starts by spending less than you earn.

Sean: Next up. You can start small. Even a few dollars a week will add up over time.

Liz: Finally, make saving and investing automatic. Set up systems that help you succeed.

Sean: 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 your question at (901) 730-6373. That's (901) 730-NERD. You can also email us at [email protected]. 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: 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.