Every day, we’re confronted by messages from advertisements and society telling us that we need a new car, new clothes, a new phone — new everything. Without even realizing it, it’s easy to fall into a thought process that goes a little something like this: If I consume more, I’ll be happier. But that’s just not true.
This week’s guest, Vicki Robin, co-author of the seminal book “Your Money Or Your Life,” challenged a whole generation of people to think critically about what they were really working toward financially, and how they could live authentically in a consumer-driven world.
Vicki and her late partner and co-author Joe Dominguez are largely credited with sowing the seeds of the FIRE movement (Financial Independence, Retire Early) as it is known today. Vicki says the reason the FIRE movement has been such an awakening for so many people is because it’s given them a steering wheel with which to take control of their financial lives — which they can use to steer themselves away from debt and other money struggles. For so many people, it feels like an awakening, she says, “like someone just sent me a life ring in a vast sea, and I’m being reeled in.”
Vicki speaks some hard and necessary truths about the concept of “enough,” and how we can fully embrace what’s “enough” for us. She reminds us that you have to want something else more than you want stuff, and tells us that for every purchase, you need to ask yourself: Is this making me happy? Is this thing really worth the number of working hours I’m going to invest in it?
Unfortunately, nothing in society today is inspiring us to think critically about how much we’re spending — every day, we are encouraged to consume. Oftentimes, the only way out of the spending cycle is introspection, and making a conscious effort to think about the future in the present. For example, asking yourself: In five years’ time, what would I like to be doing with my life? or, What are ten things I’d like to do before I die?
While on the topic of consumerism, Vicki also talks about environmental impact — people who reduce their overall consumption also reduce their carbon footprint. In this way, she says, living authentically means living without excess.
Then, in Mailbag, Jean and Kathryn talk about how to build credit scores and credit history for young people, how to save for retirement if your employer doesn’t offer a 401(k), and what to do with a balance remaining in a 529 college savings account. Lastly, in Thrive, Jean talks about balance transfers on credit cards, and whether one might be right for you.
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Jean Chatzky: (00:06)
HerMoney is brought to you by Fidelity Investments. You deserve time off, your money doesn’t. Learn how to make your money work just as hard as you do at fidelity.com/demandmore. HerMoney comes to you through PRX. Hey everybody, thank you so much for being with me today. It’s Jean Chatzky and this is HerMoney and I am, well, I’m thrilled, actually, to tell you that Vicki Robin is in the studio with me today. She’s not in Seattle or near Seattle where she usually is. She is on the road. She’s in New York and, for those of you who don’t know Vicki, she has made such a difference in the way millions of people over the last couple of decades have decided, which is a very important word, have decided to live their financial lives and have decided how to manage their time. Vicki and her late partner Joe Dominguez, who wrote a really seminal book called Your Money or Your Life, challenged a whole generation to think about what they were really working for and how they were living, whether they were doing it authentically or just trying to keep up. And the two of them together are really credited with sowing some of the seeds of the FIRE movement as it is today. Vicki, of course, though, did not stop with her first book. She’s written others including Blessing the Hand That Feeds Us: Lessons From a 10 Mile Diet where she explores food and farming and sustainability. She’s got a popular Ted Talk. She’s had quite the journey and she is here to fill us in on all of it. Hi Vicki.
Vicki Robin: (02:04)
Jean Chatzky: (02:05)
So nice to have you here and in person and I don’t want to get stuck in the past, but I do want to just give my audience who may not know of your amazing work, a little taste of where it started. Can you just give us a little bit about how you got on this journey to begin with?
Vicki Robin: (02:27)
Well I wrote Your Money or Your Life with Joe Dominguez who had developed in the 1960s a strategy for his own early financial independence because he looked at it like military service. You do your financial service. He wanted to be out by the time he was 30 and he did it in a very, very, very traditional way that we have completely forgotten or overwritten in this society. He earned as much as he could without violating his integrity or his health. He saved as much as he could without like driving himself into, you know, sort of like unhealthy penury. And he invested the money in the most secure way he could so that he could throw off an income. And he kept track of every penny that came into and out of his life. And so he carefully, carefully examined every expense and said, is this expenditure buying me the life I love? Is it in line with my values? Does it make me happy? That’s his system. It’s like as simple as it could be, I say Ben Franklin is rolling over in his grave. And doing that he had determine how much is enough. And once he had crossed over that point where he had income from the savings equal to his enoughness,
Jean Chatzky: (03:41)
The amount he needed to live.
Vicki Robin: (03:43)
The amount he needed to live. Not like, like scrimping and saving, but to have everything he wanted and needed, but nothing in excess. And I can get into how I’ve applied this, eah, then he was financially independent. So I met him along the way and I thought this is the most genius thing I’ve heard about money ever. I applied it to my own little savings that I had. I was able to live on the interest income from my savings enough so that I had the freedom to learn and grow and explore, learn things that I wanted to learn. A lot of it has to do with back to the land sustainability skills. A lot of it has to do with, you know, just understanding myself and my own life and my own psychology and being a good person and helping others out, you know, the whole girl scout boy scout thing. Eventually people were really interested in like, what is this about? Joe did some living room talks with friends and eventually I became the producer ’cause I said this is really important. And for a decade we produced seminars based on Joe’s approach. Then and the end of the eighties, I went to the first national conference on something that was brand new at the time called sustainable development, which is now very corporatized. But at that time it was a question coming out of the United Nations of we’re expanding economically and population on a finite planet. We’re on a collision course. We can see it now. We can see it on the horizon.
Jean Chatzky: (05:10)
We’re going to use up our resources.
Vicki Robin: (05:12)
And we’re already in the late eighties, we were in a condition called overshoot. We were using more of the biocapacity the planet annually than would get regenerated through natural processes. So the crisis was already there and we were just bringing it to consciousness. I go to this conference and I realize that everybody is saying the biggest driver of environmental destruction is over consumption. But since that’s the signature, you know, we’re a consumer culture, it’s right to consume, it’s our right to consume, you know, like they’re bombing us by a tie, you know, go shopping. You know, it’s like there’s an insanity. The consumerist insanity and it was cultivated. If people understood the implications 20 years out of what was being sown, then they should be sued like the Sackler family. Maybe they didn’t. But anyway we based our society and a false premise, but the program in Your Money Your Life, when people applied our steps, their spending went down on average 20% to 25% cause we surveyed people six months, a year later and almost everybody said they were happier. So I’m there at this conference and I think we have the solution to the biggest problem on the planet, and that’s when I was like, we’re going to do this. By the year 2000 we are going to be, have moderated consumption sufficiently. We were going to like, you know, savings rate was going to be 20% that’s what we said. And we were working on some social science research that said, you know, if you can get 20% of the population thinking anything then the rest is history, you know.
Jean Chatzky: (06:49)
Vicki Robin: (06:50)
It’ll catch. So we were working on catching, you know, we were on Oprah and then we became a New York Times bestseller, five years in the Business Week bestseller list. You know, just all the lists, all the major shows, all the everything. And we kept counting up the audiences like, okay, we’re going to get to, we figured we’d gotten to 50% of the country.
Jean Chatzky: (07:11)
Vicki Robin: (07:11)
No, no. The theory didn’t work.
Jean Chatzky: (07:11)
Well I don’t know that the theory didn’t work. I think that theory works for people who apply the theory.
Vicki Robin: (07:20)
No, no. I said my social theory about we were going to stop the problem.
Jean Chatzky: (07:25)
The over consumption. I heard the savings rate at 20% and I’m sure you could see me roll my eyes. ‘Cause what is it 4?
Vicki Robin: (07:32)
I think that’s generous. That’s really generous.
Jean Chatzky: (07:36)
We’ve been through periods in our recent history where the savings rate was negative.
Vicki Robin: (07:42)
Exactly. Yeah. The end of the nineties, the year 2000 I took a look at all the data and I thought, you know, I gave a decade. I would get up at three o’clock in the morning to talk to drive time on the east coast. You know, I just did everything I knew how to do to just sort of, you know, pin, put a like lots of little pins in these soap bubbles of ideas that I’m going to be, if I get, you know, if I get a new car, a new house and new wife and dog. If I get, you know, I don’t feel happy but I’m going to consume and then I’ll be happier and this completely unconscious process that, if it didn’t produce happiness but it had no ill effects, well, okay, fine. You know, but it does, there’s a remainder from all of this activity. Yeah.
Jean Chatzky: (08:29)
Let’s look inward at individuals for a second because I do think the people who found your book then have found it for the last couple of decades, have happened on the FIRE movement now, are saying there’s something there. We’ve done a number of shows with FIRE proponents and I’ve seen it in my own life, when you talk about tracking the spending, following the money, I’ve done a number of money makeovers with individuals over the years. I’ve seen that happiness light bulb go off when they feel more in control. So, where are we right now as far as the culture of consumerism and what kind of changes can people make in order to get to that happiness?
Vicki Robin: (09:16)
Yeah. Wow. That’s a great question. Number one, yes. I think it is the experience of going from being out of control, frightened, behind an eight ball, and you don’t know even what game the ball belongs to, that feeling of being utterly out of control and then finding this sort of life ring, whether it’s your money or your life or something in the FIRE movement, you find something that’s defined, it says if you do these steps, you will get here, just trust us and do it, you know, and all the formulas and all the math of it, it’s very clear. And it feels like an awakening. Like somebody just sent me a life ring off, you know, in a vast sea and I’m being reeled in. So there’s a happiness that comes from that. I think there’s another happiness with Your Money Your Life. We suggest that people ask themselves of purchases. Is this making me happy? Commensurate with the number of hours of my life I invested to get the money to get this thing. And so it introduces the question of is this whatever making me happy rather than the presumption that of course I’ll be happier if I get that dress, you know, without actually observing yourself or your real behaviors. So awareness itself, that feeling like you just sort of won the lottery or you just decoded something that you’re allowed to be conscious and make a decision to not purchase something when you’re being driven to purchase it and everybody’s purchased it, but you realize, I don’t, that’s not gonna make me happy, I think I won’t do that. It’s like we’re telling people to stop, you know, some guy who’s taking a block of wood and hitting himself over the head, just suggesting that he stop.
Jean Chatzky: (11:05)
I think that the connection between how much time did it take me to earn this money and buying that thing has vanished for so, so many people. I think people don’t even stop to think about because spending is so fast and so immediate and swipe, swipe, swipe, or click a button. I remember, I’ve got two kids, and I remember when my oldest babysat for the first time. And the $10 an hour that he earned, which was far more than the dollar an hour I earned when I was babysitting, but the $10 an hour that he earned, all of a sudden, that was so much more valuable to him than his allowance that I gave him that was the same amount of money, but all of a sudden it was his time. And that calculation I think has just gone away.
Vicki Robin: (11:57)
Yeah, right, right. Because of, because of credit cards and there’s no shame in, you know, there’s the, we have massive credit limits. As a matter of fact, the game is find people who are not going to like welch on their debt, but they’re never going to pay their cards off and that’s a perfect cash cow for the banks. You know, so the people who keep being given credit cards, they think, Oh I must be really good. And I have the $2000 limit on this card and a $5,000 on that, and and I have that much money. People think they have that much money to spend. They don’t calculate that at some point in the future they’re going to have to pay that off at 3 times the original cost. They don’t compute that. I think that part of the FIRE movement part of Your Money Your Life, too, has been this awakening that I, there’s a steering wheel here, there’s a tiller, there’s something that can steer. I can steer my boat through life by being conscious about money. I can take control and I can get myself out of this drift toward ruin that I sort of, in the back of my mind, I know that’s what’s going on but I, nothing in society is making any effort to make me conscious of that because we are consumer culture. People used to say back in the day, you know, well wait a second aren’t, you’re going to ruin the economy. And I I would say, look, I don’t need a high fat diet so that my neighbor, the heart surgeon can make money. Why, ou know, this kind of me is not loyal to you. It doesn’t care about you at all. It’s, it doesn’t care about you. Why do you care about it?
Jean Chatzky: (13:41)
Vicki, I want to go back to that but it seems like this is a good time to remind everyone that HerMoney and conversations like these are proudly sponsored by Fidelity Investments. We want you talking about your money and we’re here to remind you that you work way too hard to let your money just sit in savings. Whether you are new to the workforce, whether you are approaching retirement, Fidelity can help advise you throughout your career and beyond so that your money is working just as hard as you are. It all starts with a yearly financial checkup and an understanding of what you own and what you owe. And from there, the folks at Fidelity can work with you to evaluate your investments, to determine ways to grow your savings, to keep you on track, to reach all of your various life goals. And you can start demanding more from your money today at fidelity.com/demandmore. We’re so happy to be back with Vicki Robin. How do you get people to embrace the idea of enough? I consider myself so lucky that I did not go through high school in the era of Instagram. These poor kids who can’t stand seeing themselves in the same outfit again. I mean, give me a break, right? I’ll wear the same outfit tomorrow if I like it as much as I did today and it doesn’t smell. So how do we get ourselves to — no seriously. I mean I have… How do we get ourselves to embrace enough and to know what’s enough for us? ‘Cause it’s different for everybody.
Vicki Robin: (15:18)
Yeah. I think it’s a question of wanting something more than you want the stuff. I think it’s a question of imagination, of being able to introduce some questions of like, in 5 years time, what would I like to be doing with my life? You know, like, what are 10 things that I would love to do before I die? You know, introducing the future into the present and thinking about the possibilities of pleasure or learning or experiencing. Or like, one day I want to stand on top of Mount Everest. And if you say that and your whole body system believes that, you will do anything, you will change your diet, you will exercise, you’ll, you know, go to the gym, you’ll be doing wall climb, you’ll do everything because you’ve told your mind that this is the thing you want. So it’s that we have not taken our gaze off of the constant stream of things to want. So I think, rather than deprivation, what we need to work on is wanting something that requires more of us than the products. You know, I want, you know, you can say, I want to write a children’s book and illustrate it.
Jean Chatzky: (16:39)
You wanted to be a standup comic.
Vicki Robin: (16:41)
Right? Exactly. Exactly. So it’s the wanting mechanism and the wanting mechanism has been inhabited by the consumer culture. The very core, gut level, desiring mechanism has been taken over by false stories about happiness and consumption. Because you know, we all know that we’re happiest when we achieve something, not a purchase, but we said, I want to do a 5-minute standup comedy routine or whatever, and you work hard and you get over all your embarrassment and you do it. There’s no better feeling. There’s no better feeling than expending some of yourself to achieve something that you yourself says has value. That is the best. And so there’s part of this, this part, you know, our imagination has been taken, our storytelling capacity, has been taken over by stories that are generated to have us consume things. It’s an utter degradation of human consciousness. So I would say that the thing to really focus on, in addition to keeping track of your money, but you do the mechanics because you want something else. And for a lot of people in the FIRE movement, what they want is out.
Jean Chatzky: (18:02)
Is there a detox phase? Is there a phase that’s painful to go through when you’re weaning yourself off the stuff?
Vicki Robin: (18:11)
You know, there may be for some people. I, for myself, I was like, I always thought I was sort of beating the system. I was, you know, beating the man, you know, like I felt smart, I felt clever. I felt like, ha ha ha, I didn’t, you know, there was a worm and I didn’t invite it. Now I get to be free another day. I used to say I’m buying my freedom with my frugality every day. So for me the game is, the cat and mouse game is, you’re trying to get me to buy stuff and I’m not going to do it, unless I want to. And then I will. I’m sovereign. I am sovereign, not you.
Jean Chatzky: (18:48)
I want to learn a little bit about where life has taken you in the last decade. You’ve become a real social innovator within the sustainability movement. Talking a lot about food, writing about food. Talk to us about that.
Vicki Robin: (19:06)
It’s all of a piece. I mean it all goes back to this idea of that we’re in a condition called overshoot, that we’re using more of the planet every year than the planet has. For me, that was like my social conscience wake up call, is I wanted to do what I could to interrupt that, you know, drive off the cliff. And then after, as I said, after I realized in the year 2000 that none of the external data was going in the direction I had hoped. The next thing that made a lot of sense to me was relocalization. Relocalization is just the idea of analyzing resource flows through your life. It’s sort of a collective, Your Money Your Life. So you know it’s food, water, clothes, cars, electronics, and you just say, where did this come from? Where does all these things that my life depends on come from? Where did the pitcher come from? Where did the glass come from? Where did the tablecloth come from? You know, all the things that come through my life that serve my life. It becomes curious about where are they sourced. Because you start to think, if this whole metastructure is not sustainable, if it’s going to fracture by the weight of the demand on a system that can’t support the level of demand, I’m going to think about what I need to have a happy life. Not just me personally, you know, dipping into the macroeconomy, but my community, what does my community, what flows through my community? It’s a very interesting process. And you start to think, what do we need? My community is not going to produce gasoline. But it could put in solar farms, which we have.
Jean Chatzky: (20:52)
You live on Whidbey Island outside Seattle.
Vicki Robin: (20:55)
Yeah. So, so we have some, we have a solar farm. It powers one complex of buildings, you know, so you start to think, okay, energy, what do we need? Oh, maybe, maybe an electric, I got electric bicycle, you know, and then, Oh yeah, if I had a solar panel electric bicycle, now I’ve done mobility. Okay. So that’s beginning to realize that dependency for everything on a big old world I have no control over, in the condition of overshoot and unsustainability, that’s gonna crash some day, so I’m going to make sure that my community, whether it’s a town, you know, a county, a state, I’m going to do a resource flow analysis of that and see where we can move ourselves toward greater self sufficiency. So I started working on food and I asked a farmer friend, you know, I live on a semi-rural Island, you know, there’s really, really great farm land in the middle of the Island is very, very rich. And I asked her whether we live on this island, 65,000 people on this Island, could eat from the Island if the ferry stopped running. And our little bridge on the north went down and she said, yeah, for two weeks in August. It’s like I realized how food insecure we are. So that’s why I did this, like, I’m going to do an experiment. I’m going to see, I’m going to devote myself, you know, for 30 days, I’m going to eat within 10 miles of my home and see what happens.
Jean Chatzky: (22:27)
How’d it go?
Vicki Robin: (22:29)
I lost weight. Yeah. But I found it. Again, that wasn’t a problem, but it was fascinating. I mean, I have the book, Biting the Hand That Feeds Us is about that adventure. Yeah. Number one, I gave myself four exotics things I was unwilling to live without. I actually could replace at least two of them. Lemons, oil…
Jean Chatzky: (22:52)
Please say chocolate and wine.
Vicki Robin: (22:53)
And salt. No, no, there is wine on would be Island. I would be fine, but I don’t drink wine. So, you know, and actually we could, you know, I started doing an analysis of my food system. How does it work? And, so I’ve supported all sorts of projects like growing grain, you know, if you can grow grain, then you can not only have, you know, some form of grain for a meal, but you can also make booze. You know, you can grow hops, you know, you start to understand. I see, it’s not that hard to feed yourself from your region, if you’re willing to adapt. Like where I live, if I’m willing to have kale on a fairly daily basis, I’m not going to starve. Kale, potatoes, nions grow really well. We have tons of apples, we have legacy apple trees, you know, that just, you know, throw off their apples. So you start to analyze your food system and food becomes precious. Food becomes precious. And then I learned so much about the integration of animals and landscapes, you know, the fertility cycles are so important and now, you know, with our compartmentalizing minds and we think, okay, we’re going to solve climate change by, nobody’s going to eat any beef, but wait a second, you know, for people who are into regenerative agriculture, people understand that local and real regional agriculture is how the world’s going to feed itself. If you don’t do this where we’re toast. Literally. No, you don’t have any toast. So I, I learned a lot about livestock production and farming and, and this whole idea now re localization was my key. Then. Now, the key is regeneration. You know, how do we rebuild healthy systems once they were disassembled?
Jean Chatzky: (24:40)
So years after you embarked on this years after you saw the problem to begin with in the minute or so we have left, do you have hope for where we are today?
Vicki Robin: (24:55)
In the traditional sense of am I looking into the future and I see something better than today? No. But that’s just one form of hope. In the sense of the vitality of hope, like if I work hard, I can make a change. I actually don’t have that either. What I have, though, is I understand that things are coming apart at the seams now that the consequences of our choices for so many years, that the fact that we did not stop this train, means that there is a lot of fracturing going on. But that means that there’s another piece of us, it doesn’t mean that you know everybody’s going to come out of this alive, but it means entrepreneurship, compassion, maturity, some very important things about basically being resourceful, not depending on resource, says, but being resourceful, people are going to need to step up to the plate, and I have a feeling that at least a goodly amount will. And so being thrown back on your own resources, anybody who’s lived a life and has had to reset the life because of a divorce or because of something, you know, a partner dies, you know that it’s tough, but, you become tougher. So in that sense of people waking up to the facts of life, and that there are limits, and they’re going to have to live within limits, and that they can’t be isolated, they have to work together, these are values I’ve worked for for 30 years. I am not relishing what’s coming and I don’t even rely on what I’m talking about, but we’re going to adapt to a different world. That’s absolutely true. And the sooner you embrace that and go like, this could be interesting. You know, what other resource flows in my life? What do I actually need? And how can I work together with others to meet and greet what’s coming? That would be what I my answer to hope.
Jean Chatzky: (27:00)
Vicki Robin, you are amazing. I hope that all of my listeners who never read Your Money Or Your Life will go out and pick it up or download it, whatever they have to do to get their hands on it. Thank you for being here.
Speaker 2: (27:14)
Yeah, and they can go to the website, yourmoneyyourlife.com and they get a free little summary of the book as a starter, their little free starter kit.
Jean Chatzky: (27:27)
Fabulous. We love free. Thank you.
Vicki Robin: (27:30)
Jean Chatzky: (27:31)
And we’ll be right back with Kathryn and your mailbag. HerMoney.com’s Kathryn Tuggle has joined me in the studio. Hey Katherine.
Kathryn Tuggle: (27:41)
Jean Chatzky: (27:42)
That was exciting for me. I was very, I don’t know if you could tell, but very happy to have her here.
Kathryn Tuggle: (27:48)
Love her. And I could tell. I could tell you were happy.
Jean Chatzky: (27:50)
Little bit of a geeking out moment for me. I have those when I meet these pioneers of personal finance who I just feel really paved the way for so much of the great work that came after it. And I love the fact that she has kept on doing it.
Kathryn Tuggle: (28:08)
Right. Particularly with authors, I geek out. Yes, they were doing it before there was Instagram, you know, and really to write a book you have to really explain things in detail, which is the stuff I love.
Jean Chatzky: (28:21)
Yeah, no, fantastic. And what she was saying about this never having enough is something that really resonates I think even more today than when she wrote the book.
Kathryn Tuggle: (28:34)
Absolutely. Because you are surrounded every day in advertisements and on social media by people who have so much more than you or who pretend to have so much more than you.
Jean Chatzky: (28:44)
Right. And this American habit, and I think it is truly American, I don’t think it’s as ingrained in other countries, of just comparing and measuring up. And if they’ve got that, then I want that. There’s never an end. I’m struck every day as we walk into our offices by the line for the Rent The Runway drop off box. Kathryn and I, we work in a WeWork in Manhattan and Rent The Runway has struck these deals with some WeWorks where they’ve got boxes where people who are subscribing to Tent the Runway Unlimited, which allows you a certain number of pieces at a time, can hand theirs back in so that then they can order more. It’s out the door, the line is out the door.
Kathryn Tuggle: (29:38)
It’s out the door. It’s out the door to the point that I’ve begun giving it as instruction to people who are meeting with us at the WeWork, I’d say, look for the epic line of women with bags of clothing and then you’ll know you’re in the right spot.
Jean Chatzky: (29:48)
And I love where this comes from. It comes from a place of not wanting to shop for disposable clothing, not wanting to blow your budget on clothing that you truly can’t afford. The sharing economy. This is all a big part of it, but it also comes from not wanting to be photographed and put online wearing the same thing that you wore a couple of days ago and that I don’t get.
Kathryn Tuggle: (30:16)
Right. And then I wonder, for people who don’t know about Rent The Runway, they just assume that these women have Dolce and Gabbana new outfits every week? Right.
Jean Chatzky: (30:27)
Maybe. I don’t think it’s Dolce and Gabbana by the way, on Rent The Runway. I mean I think, yeah, I did Rent The Runway Unlimited for a little while and I may go back and do it again ’cause it’s really fun and it did save me a lot of money not shopping. They’re more mid-tier labels. So you know more Diane Von Furstenberg, not $3,000 dresses, $300 dresses.
Kathryn Tuggle: (30:50)
Well clearly I’ve never done it. But it is interesting because were you to try to purchase that many new clothes that you owned it would be a crazy amount of money.
Jean Chatzky: (31:00)
Crazy, crazy. Anyway, lots and lots of good lessons in what Vicki Robin had to say. I’m looking forward, I’ve got a trip out to Seattle coming up and I’m going to take her up on her offer to come visit her on Whidbey Island.
Kathryn Tuggle: (31:14)
Oh, that sounds amazing.
Jean Chatzky: (31:15)
Yeah, very excited. What do we have in mailbag today?
Kathryn Tuggle: (31:17)
Today our first question comes to us from Deb who writes, I am an avid fan of your show and have learned so much about how to manage my personal and family finances as well as all the other great life learnings your team puts out there. I started working on helping my oldest develop his path to financial independence with a debit card and an allowance at 14. As soon as he turned 18 he got a credit card from his bank in just his name. After six months he had a credit score. He just moved off campus and he put his internet bill in his name, which required a credit score, so that felt like a win. But here’s where we are stuck. He’s now 19 his credit score is good at 722 but I’m confused as to how he can continue increasing it. He tried applying for a second credit card but was denied and that credit inquiry actually lowered his score. I would love ideas for how to build credit history and credit scores for young people. What are other financial independence practices that I should be teaching my teenagers? We are on the same path with our 15 and 16 year old daughters, but maybe I’m missing something. Keep on spreading the knowledge. Thank you, Deb.
Jean Chatzky: (32:21)
Thank you Deb. I love this question. I think you’re doing everything right. Here’s where I would push pause for just a second. Credit score of 722 for an 18 year old is fine. It is good. It may not be burgeoning on excellent, but it will get there as long as he uses the one credit card that he has doesn’t go over, 30% in his utilization of that card. So if he’s got $1,000 credit limit, he should charge no more than $300 at any point. And if he’s getting to that level, go ahead and just pay the bill or ask for an increase in the credit limit on that card and then pay the bill on time. And that’s all he has to do. His credit history will build on that single card. I worry that if he gets an additional card, although you have clearly raised him to be a very responsible human being, it may become more of a temptation to spend, and we really don’t want to see that. The other thing that you could do, but I don’t think it’s necessary, is to encourage him to become an authorized user on one of your cards. That’s typically a solution that we recommend for parents whose kids have absolutely no credit in their own name. Yours already does, so I probably wouldn’t go down that road. I think it’s just a matter of being a little bit patient. When he gets out of school and rents an apartment, maybe buys a car, all of those things will become longterm parts of his history and he’ll continue to build and increase that score. And as far as your daughters, I think you’re on the right path. The only thing that I would mention is that as your kids get older, with the debit card and with the allowance, you want to make sure that they’re being asked to take on more responsibility for the monthly expenses that they are required to cover. So the allowance can go up, the expenses that they have to cover can also go up, but the level of responsibility goes up as well and the hope is that when they head off to college, you can do it without worrying that they’re going to go through a semester’s worth of money in a couple of weeks.
Kathryn Tuggle: (34:41)
Jean Chatzky: (34:42)
Kathryn Tuggle: (34:43)
Our next question is from an anonymous Midwest listener, so hello to the Midwest. She writes, I was recently introduced to your podcast via one of my coworkers. I binge-listen to your episodes and truly enjoy them. I feel I have learned so much. I currently work for a firm that does not offer a 401(k). It is a small company with fewer than 50 people and the owners are not interested in offering a plan to the employees. Some of us are approaching the max limit for the IRA deduction. I was interested in knowing what is a good way to save for a tax deductible or pre-tax contributions, which in turn put us in a lower tax bracket. I’ve done research but couldn’t really find anything.
Jean Chatzky: (35:21)
Great question and there are so many people in this boat because a lot of small employers don’t offer 401(k)s, it’s, it’s an expensive benefit to put on their menu, in some cases. A lot of people work for themselves and don’t have this option, so maxing out an IRA is absolutely your first move. I would then look at your health insurance. If you have a high deductible health insurance plan, you may be eligible to make a contribution into a health savings account. The limit that singles can put in for this year is $3,550, for a family it’s $7,100. But that money can then be used to pay for healthcare in real time, which means if you put it in in pretax dollars, you take it out without paying any additional taxes on it. You’re essentially saving about 25% on the cost of any healthcare expenditure that you use it for, but you don’t have to use it in the year that you contribute it. You can allow it to grow, you can invest it like money in a 401(k), and it can over the years become a very powerful supplemental retirement account. The deal on distributions is as long as you use the money for healthcare expenses, you will never owe any additional taxes on them. In retirement, if you use the money for things other than health care, it’s treated just like a 401(k) distribution, meaning you’re going to pay income taxes on that money, but you won’t owe any penalties. So I would absolutely look at that. And then if you have additional money that you are able to put away, just do it. Don’t worry about the tax deduction. Put that money in a brokerage firm, invest it in a way that lines up with your risk tolerance and your goals and you’re going to be good to go.
Kathryn Tuggle: (37:28)
Fantastic. Last question comes from Corrine. She writes, I’m in love with the podcast and as a 22 year old college graduate, it has helped me tremendously to gain footing with my finances before stepping out into the real world.
Jean Chatzky: (37:41)
Kathryn Tuggle: (37:42)
My question is about what to do with the remaining balance and my 529 college savings account. After graduating, I’ll have about $25,000 remaining in the account. My grandparents set me up with this college money and it has been the biggest blessing in my life and something I would like to pass to my own kids. I’m graduating debt free and because my 529 has benefited me so much, I want to let the remaining money continue to grow from my children. How do I go about doing this? Is it even possible to set up an account for kids I don’t have yet.
Jean Chatzky: (38:11)
Again, our listeners are just so smart, right?
Kathryn Tuggle: (38:14)
They are incredibly impressive.
Jean Chatzky: (38:14)
They’re so impressive and so smart. You don’t have to do a thing. You can just keep the money in your own name, in your own account, continue to let it grow. Should you decide that you want to go to grad school, you’re able to use it. But, the deal with 529 money is that you can transfer the money in the account to the account of anybody else in your family in any given year. So when those kids exist, then you can go ahead and transfer money into their account, once you’ve established those accounts. The one thing that I would do is look at how the money is being invested right now. As we near any goal, we generally get more conservative with our investment strategy. So in the 529s that I had for my kids, I was really, really aggressive with the money when they were babies. In fact, all the way through elementary school. When they were in middle school, I moved it to a more moderately aggressive portfolio, and by the time they were in high school, I got conservative. Because you now think this money is for kids who have not even been born yet, you can take more risks. So I would absolutely take a look at that. And I think that your grandparents would be really, really happy with that decision, that their gift that they made for you could fund education for generations to come. That’s a really, really powerful thing.
Kathryn Tuggle: (39:43)
Jean Chatzky: (39:43)
Yeah, absolutely. Thank you, Kathryn.
Kathryn Tuggle: (39:46)
Jean Chatzky: (39:47)
In today’s Thrive in the fight against debt, aren’t we all looking for solutions that are easy to implement and accessible to all? Well, it turns out such a thing not only exists, it’s also grossly underused according to the folks at Bankrate. I’m talking about balance transfer credit cards, which allow you to move your existing high interest rate credit card debt to a new card with a 0% introductory rate that can last for 18 months or longer. Essentially, once you make the switch, your goal should be to pay down your debt as quickly as possible before the 0% rate expires. Yes, there are fees associated with most balance transfers, usually about 3% to 5% of the debt that you’re transferring, but if you’re paying down a large balance, this can be one way to save thousands of dollars. Using today’s average credit card balance of about $6,000, Bankrate calculated that users could save as much as a 1,000 with a balance transfer card over the course of 18 months. But if your balance is higher than that and you use your 18 months to aggressively pay down your debt, then you stand to save much, much more. Thank you so much for taking time to listen to this show today. Thank you so much to Vicki Robin for stopping by. If you like what you hear, I hope you’ll subscribe to our show at Apple Podcasts and leave us a review. We love hearing what you think. We’d like to thank our sponsor Fidelity. We record this podcast out of CDM Sound Studios. Our music is provided by Track Tribe and our show comes to you through PRX. Join us next week. We’ll sit down with another great guest and we’ll talk soon.