As a financial coach, Paula Christine gets many questions pretty frequently. And while everyone's individual situation is different, we dive into a few of them in today's episode of Beyond The Paycheck, including:
Paula and Jon talk about specific examples, including a client she helped create a budget. And the client couldn't believe how much she was spending each year on just one thing.
For help with your finances and planning, you can reach Paula Christine by email at paula@paulachristine.com or visit her website: http://paulachistine.com/
Jon: Welcome in to beyond the paycheck. I am Jon"JAG Gay and I'm joined by Paula Christine, Paula. Great to be with you.
Paula: Hey Jon, how are you today?
Jon: I'm good. We thought it'd be a good idea to do an episode on some of the most common questions that you get as a financial coach. I feel like a lot of these are gonna be universal.
Now the caveat here is everybody's individual situation is different, so not every piece of advice is going to apply to everybody listening, but generally speaking, it seems like these would be some good points to cover today.
Paula: Sure. What's your first question.
Jon: First question is. I'm going to walk into your office and say, Paula, how much do I need to save?
Paula: Ah, so you're right. That doesn't apply to everybody. I mean, rule of thumb is 20%, but let's be realistic. If you're just starting out in life 20% of your income can be difficult to do right from the beginning. So what I like to tell people is first of all, create a budget and see what you need to cover your everyday expenses.
And then ultimately you want to pay yourself first. And what that means is that you want to put into your savings first and then all your other expenses. But I get it. I was in my twenties and thirties and raising kids and married. So I understand that it can be a challenge to try to figure out how much to save.
Jon: You are preaching to the choir there. My first radio job out of college, I think it was $19,000 a year in 2004. So I did not have 20% to set aside, but I want to come back to that point you made a minute ago, and that is paying yourself first, and what that means. Because I think for so many of us, myself included, for the longest time. Okay. Here's my paycheck. Here's my electric bill. Here's my gas bill. Here's my rent or my mortgage. Here's my budget for groceries and you tick down the list. Hey, is there anything left? Okay. If there's anything left, here's a few bucks towards savings. But if you get into that mindset, the younger, the better of course.
But if you get into that mindset, Making one of those line items in your budget, saving for your retirement, saving for your future, that will get you in the habit of doing it. Yeah. Maybe you get a few bucks less to go to the bar. If you're younger or out to eat, if you're past the point where you're going to the bar, but it really goes a long way to pay yourself first. I love that idea.
Paula: The first item on your budget is paying yourself. And if you haven't created a budget, we do have on our website, an Excel or Google sheet that you can download to start creating your budget. But that is the first line item is to pay yourself first. You've got to get in that habit.
Jon: Absolutely. The website is Paulachristine.com. So I mentioned a minute ago, my early days not making a lot of money as a poor radio DJ in my twenties. I'll be honest. I got into quite a bit of debt at that point because they had more money going out than I had coming in. And I made some stupid decisions when it came to travel and buying toys and things like that.
So when I walk into your office, Paula, and I say, how do I get out of debt? What are some common practices that you typically recommend?
Paula: Well, first of all, I don't like to hear people say they've made stupid decisions. I mean, you've you made a decision. It may not have been the right decision, but you made it. So forgive yourself that you made it and figure out how you're going to go forward.
Getting out of debt can be pretty tough, but you have to make a commitment. Like you make a commitment to anything. You have to determine how you're going to go about that. And again, it all starts with the budget. Making a list of everything that's going out and if there's any extra. So there's a couple of different methods to paying off debt and we can get into some of those, like the snowball method says that you're going to look at all your dad and you're going to pay off the smallest debt first. That's great for people who need to feel that sense of accomplishment. Like, oh my God, I've got one done. Okay. Then I'm off to the next. And it makes you feel pretty good. I'm that kind of person like, I'd like to see positives happening along the way. So I feel like I'm accomplishing my goals.
Jon: Much like that snowball starts at the top of the mountain. It's a little snowball. And then I take care of the little snowball gets momentum and then you build it from there.
Paula: Correct. Another way you can consider as the debt avalanche and that uses paying off the highest credit card interest first. So with that, you're gonna end up paying less for your debt because you're going to be paying off the highest interest first versus the snowball,l it's the smallest
Jon: account.
So I think back to myself, when I had probably three or four credit cards and I had on at 15%. One at 20%, one at 25%. The idea here is you pay off the 25 first, so that all that money is going more toward principal. And you're not getting whacked with as much interest as you start chipping away at it.
Paula: Perfect. That's exactly what you want to do. Now, what you also want to do is let's say that you're paying off those credit cards and you're paying 100 dollars on one, 50, and maybe 20 on the next. So once that a hundred dollar credit card, the first credit card you're going to pay off, you take that a hundred and you apply it to the second one.
Jon: So once you get one paid off, it's not that you've got more walking around money.
Paula: No, no.
Jon: It's that you've got more money to put toward the next piece of your debt, right?
Paula: Yes, yes. And there are some great calculators that you can find online that can help you determine what may be the best method for you. And we also have on the website, a PDF that you can download that goes through different debt strategies and also has links to those calculators that I just mentioned.
Jon: So it's different strategies, different strokes for different folks. You can kind of play around and see what makes the most sense for you in terms of both your financial situation and your mindset. To your point, Paula, maybe it's.
I want to get some stuff off my plate. Or it's Hey, I want to get these big, massive interest payments away. Whichever seems to float your boat for your personnel and your situation.
Paula: Correct.
Jon: Talk to me about an emergency account, and I've heard so many different facts and figures on this. As far as something happens with my job or my health or something else that's unforeseen, and I don't have an income anymore. What do I need to have in the emergency account? Is there a good rule of thumb here?
Paula: Oh, the rule of thumb is three to six months, depending on your situation. Again, everything depends on everybody's situation. If you're married, let's say, and you're both you and your spouse are working. You may only need three months because maybe your spouse can cover all the expenses. If you're single like myself, I'm looking at six months, possibly even a year of expenses because if something happened to my income. I've got to have something to back me up. So everybody's situation is different. But most people I find don't even have an emergency account.
So you need to get started with one and again, it all goes back to the budget and figuring out what you can save. Then you have to think about, do I get out of debt? Do I have an emergency account? You've got to weigh all those different options, but when you start with your emergency account, if, and if it's $10 a month. Start somewhere and reward yourself as you're going along the way. So if you get that first thousand dollars in your emergency account, reward yourself somehow. Go get a coffee or an ice cream or whatever makes you happy.
Jon: Just not something that costs a thousand dollars.
Paula: Yes. Don't spend your emergency fund. I was talking with someone yesterday and they said, I have $40,000 in my emergency kit. And I said, great. I said that a really good amount to have. And she says, oh, what's an emergency?
Jon: Oh, that's a good question.
Paula: I said, well, emergency is like your husband just quit his job two weeks ago without having another job. So that is an emergency. You need to have income to cover those expenses until he finds something, or an account to cover those expenses until he finds something else. But it could be that the furnace breaks or something happens with the car where you're like, I need a car repair or major dental work needs to be taken care of. And once you use that money on your emergency account, then you have to have a plan to put it back into your account. So once you spend it, you gotta be able to put it back.
Jon: And that comes with getting that new job. If you're not working, that can be, it might be, it might take a bit longer to replace it. If you're not working versus say the furnace goes. Right?
Paula: Correct. But you know, if you think about it, if you really want to get ahead and you have a limited income, and you need to maybe possibly get out of debt or build out an emergency accounts. Sometimes you look to pick up a part-time job until you can get that stuff built.
Jon: No shame in that. Absolutely. Yeah. Whatever you need to do to make ends meet.
Paula: Yeah. I remember when I was in my thirties and recently divorced, the kids would go to my ex's and then when they were visiting him, I would be working. So it was a great way for me to get ahead.
Jon: I keep going back to the same example here, but that radio job that I had in Burlington, Vermont, I was the night DJ. So I actually had time during day. So I went to the Vermont Teddy Bear company every year at Christmas, Mother's Day and Valentine's Day. And I took orders for Vermont, Teddy Bears and Pajamagrams, and made a few extra bucks every week to try to make ends meet.
So really good point. You mentioned a minute ago, the saving versus paying off the debt, Paula. And what comes first? Should one prioritize over the other or is there a balance?
Paula: That's a tough question to answer, because it really becomes income flow, but ideally if you get out of debt, you'll have more money for saving.
But then if you don't have any savings, then something happens, you don't have any money, then you get further into debt, right? What's that called, a catch 22? I think there's a way to find, you know, let's say you let's say you had a hundred dollars extra a month and you could put maybe $70 of that to pay off debt and $30 to go into savings so that you're kind of accomplishing both, things.
Jon: Yeah. So finding that right balance to split the difference so that you can be taking care of both and you don't get one too far out of whack, whether it's not having enough savings or getting too far behind on paying off the debts.
Paula: That's a really good point. I understand that sometimes it gets difficult and you want things or you need things, and it comes easy to just swipe that credit card and you just really want to stop and think about, do I really need that?
Is it a need or is it a want? And determine what is it that you truly need to have. And if it's a want can it wait for a time later when you can afford it? You just have to think before you make decisions.
Jon: Another way to think about that is if you think about what you make per hour at your job, say you make, I don't know, $35 an hour, and you see something that you want not need, but want.
And it's a hundred bucks. Is this worth three hours of my workday to spend this money on this right now? Or can it wait?
Paula: Correct. That's a great way of thinking about it.
Jon: Okay. So you mentioned earlier the idea of creating a budget and there are spreadsheets on the website, Paulachristine.com that can kind of walk you through this, but just in a general sense, I walk into your office, I'm like, I need a budget. Paula help me. You're a coach, coach me. How do I go about creating a budget?
Paula: Actually today it's pretty easy and enlightening to do this. So what I asked people to do, is go and look at their credit card statements and their bank account and download everything that you've spent over the, not last month, but over the last 12 months, so that you can kind of get a really good idea of what your spending looks like, and then start to categorize.
I was talking with this woman the other day. And she's like I spend a lot on my hair and I'm like, well, how much do you spend on your hair? And she didn't realize it until she looked, when she did that project, she looked and she goes, oh my God, I'm spending, okay, she was spending $5,000 a year on her hair. So that's a lot of money on your hair. Her hair is gorgeous.
Jon: I hope so.
Paula: It is. I mean, it is gorgeous. I'm actually jealous. Her hair is beautiful. Then she stopped and she goes, that's a lot. I'm like, yeah, that is a lot. And I'm not here to judge anybody, but she looked at it herself and realized that's just way too much money to be spending on her hair. And so she rethought that, but you don't know until you look at it and you have to look.
Jon: That actually happened for me, obviously I'm bald, it wasn't hair. But for me, it was going out to eat and fast food again, more so when I was younger, but still a little bit in recent years. Where, oh, you know what, five bucks here at Starbucks, 10 bucks here at this restaurant, 20 bucks here on this restaurant. Oh, it's Friday night. Let's go get takeout.
And it adds up so quickly doing that exercise and seeing, oh, I didn't realize I was spending this much on coffee or this much on food or this much on my hair or this much on alcohol. If I like to go to the bar on the weekends, whatever it is, having the numbers in front of you.
And to your point, it's so much easier to look at it now, because if you're swiping everything and you aren't really paying cash for much, You just download the statements from your bank and you put it in a spreadsheet right there for you. You whoa, that category is getting pretty big because at five and 10 bucks a pop, you don't think about it. You multiply that times, however many days or weeks in a year. That's when those numbers get huge.
Paula: So what you got to do is once you prepare your budget, then you have to track. Let's say that you have $500 a month to spend on going out to eat dinner, whatever it is. Then you need to keep track of that on a weekly basis, knowing that you're within your $500.
And so if you go over or you're in your last week of the month and you go, oh my God, I spent my $500. What am I going to do this week? What are you going to do? Then you're going to go over your budget. And then that's when you start to get into debt because you spend more than you're bringing in. And it's just a spiral after that.
Jon: A lot easier to manage it on a weekly basis that a monthly basis or a yearly basis.
Paula: Correct.
Jon: Really good stuff in terms of some of these general ideas of budgeting and financial planning, this is why people come to you as a financial coach. Paula, if somebody wants to know more about you, best ways to reach you are?
Paula: Email me at paula@paulachristine.com. Or you can go to the website, which is Paulachristine.com.
Jon: All right. Another episode of Beyond the Paycheck in the books. If you like what you hear, you can follow our show on Apple, Spotify, or wherever you're listening right now. Thanks so much, Paula.
Paula: Thanks, Jon.