Managing Your Budget During a Changing Economy

[MUSIC PLAYING] BRANDI GOMEZ: Hi. Welcome to our podcast MakingCents, brought to you by Navy Federal Credit Union. I'm one of your hosts, Brandi Gomez, and I'll be taking your questions to the experts to help you make sense of your money, pun intended. 

 

Welcome to the MakingCents podcast. We are so excited to have our guests today. We're really going to be looking at how we manage our finances, especially in the tough inflation that we are experiencing right now, what that might mean one day if we reach a recession. So with me today, I have Bob Frick, Navy Federal Credit Union's Corporate Economist, and Thomas Racca, who is the Manager of Personal Finance Management at Navy Federal. Welcome to the show. We are so excited to dive in with you. 

 

BOB FRICK: Thanks, Brandi, great to be here. 

 

BRANDI GOMEZ: Great. Well, to get things kicked off, I think that you all would do a much better job in explaining your role here at Navy Federal. Tell us about your journey here and what all that you do to serve our members. 

 

BOB FRICK: Well, I'll kick it off. I'm the corporate economist, and basically, an economist who looks at consumer issues. And I also, previous to this, worked for 15 years for Kiplinger's Personal Finance magazine. So though I'm an economist now, I have a lot of background in personal finance. 

 

THOMAS RACCA: So Bob has a much cooler day to day than I do, but in my role, I manage a team of certified financial counselors. And we deal with folks that are pursuing their financial goals, may have found themselves in a financial hardship or are just trying to find a way to get there budgets in order. 

 

BRANDI GOMEZ: Let's kick it off with really trying to understand, what are the headlines that we're seeing these days. I feel like I kind of take a pause when I go to open up any news site, or to even look at the total when I go to the grocery store. So tell me a little bit about what you're seeing, what's going on. 

 

BOB FRICK: Well, we are all being beaten up by inflation right now. It seems every time we go to the pump, or just as you say, Brandi, go to the grocery store, we get hit with a bill. And it's tough. It's making a lot of day-to-day decisions tough. It's making paying bills tough. So it's something we're all facing, but it's much more of a hardship, of course, to lower-income people. 

 

THOMAS RACCA: Yeah, and PFM is talking to folks today that we've never spoken to in the past. I think these hardships are hitting folks harder, and we haven't really seen anything of this magnitude since 2007, 2008. 

 

BRANDI GOMEZ: And when you say "PFM," Thomas, Personal Finance Management, for those listening. When you get calls like that, when your team members are fielding calls from our members, maybe they're feeling helpless or really starting to feel the effects of inflation in their everyday lives, where would one start? Where do we try to get control of our budget in this type of situation? 

 

THOMAS RACCA: Yeah. The first step that we do with every member that we speak is to start out with a detailed review of income and expenses. We need to know how much is coming in. We need to know how much is going out. And in particular, we need to know exactly where it's going. And if you don't have that information, it's very hard to progress to the next steps in getting your financial house in order. 

 

BRANDI GOMEZ: Anything you want to add to that, Bob? 

 

BOB FRICK: Well, I mean, obviously, Thomas is spot on. One of the things I would add as someone who's worked in behavior is, that sounds simple, but it's very hard for a lot of people to do. There's a lot of avoidance that goes on, especially when people know things aren't adding up. The last thing they want to do is confront the problems. And one of the things that Thomas's team is so great at is just kind of walking them through the steps to get them to that point. 

 

BRANDI GOMEZ: Are there any specifics that we can be looking at? I know for me personally, I look at my streaming services. And that's one of the first things I try to evaluate. And do I really need to watch that show? And I make probably a bad decision in that case. So what should we be looking for when we're laying out our budget? 

 

THOMAS RACCA: You know, each time we speak with someone, it's a very personal conversation, and everyone's situation is so unique. That's actually something that we see quite a bit of, is you sign up to watch a show, and you end up just letting the 10 or 15 bucks a month slide, because when is the next season going to start. And you end up doing that with four or five, six different platforms, and pretty soon, you're talking some real money. 

 

So one of the things that we find ourselves giving as the most frequent form of advice is, pivot your services from month to month. You might stick with Netflix when the new show comes out. Binge watch it. Give yourself 30 days on the platform, and then switch over to whatever the hot show of the next season is. 

 

BOB FRICK: One of the things that Thomas and I worked on for a while, which unfortunately, we didn't get to test, is the idea of recommending people have a two-budget system. So you have two checking accounts, one for your expenses that you have to pay, and one for your discretionary spend. 

 

What's interesting to me in the research that led up to that is, people tend to put streaming services in their necessities. And the thing that people put in their necessities is like, oh, my golf course membership, you know, my boat payment, whether you use the boat once or twice a year or not. And so that's really kind of an interesting thing is what people think are necessities when those should really go in the discretionary category. And you can cut a lot of money when you kind of rethink that. 

 

BRANDI GOMEZ: I feel that. Don't come after my exercise services, or we might have to have a talk. That's for sure. 

 

BOB FRICK: Right, right. So the idea of budgeting, I know, even for myself, it can be a little overwhelming. So when we talk about creating those two different budgets, how can people work around those difficulties or make those small adjustments? You mentioned a few examples, but what are some other things that we can try to change for the better? 

 

THOMAS RACCA: Yeah. So I'll say a few things that are interesting that we see. And a lot of individuals assume that just having more income is one of those things that keeps these types of problems at bay. And I'll tell you that we see folks that come in that are extremely solid earners. They have six-figure incomes, and the truth is, the numbers that are on the monthly budget are just a little bit bigger than what we see compared to the average salary coming in. 

 

The most important thing that any of these things are to really elicit real change is going to be having an honest conversation with yourself and with your family, and determining what's a need versus what you want. And so much of this sounds like an elementary conversation, but you'd be surprised how many folks don't know exactly how much their bills are. 

 

How much are they really spending at the pump? How much are they really spending on eating out? We're quick to point a finger at that $5 coffee every day, but the truth is, we end up spending a lot more money on just bad financial habits. And it becomes so ingrained and so much of a habit that we really fail to stop looking at it as a potential issue. 

 

BOB FRICK: Yeah, there's this inertia that we all suffer from as human beings. And money inertia is one of the most powerful things, because you get used to something, and you just don't even think about it. You don't give it a second thought. 

 

When I went from my journalism career, which is 30 years in journalism, you do not get paid a lot. And I went into finance, not initially with Navy Federal. I got a good raise, and after a year, I thought we'd be swimming in money. We were in the same tight situation we were beforehand, because we had expanded our spending to soak up all the extra money. 

 

And we had to do a rethink and look at some of the things we're spending money on, and that was hard, and it was painful. But once we got it pared back and started saving, then we got the cushion that I'd been dreaming of for decades. 

 

BRANDI GOMEZ: The cushion. Oh, we long for the cushion. 

 

BOB FRICK: Yeah, the cushion. The mythical cushion. 

 

BRANDI GOMEZ: It makes me think of my husband. He's in the Marine Corps Reserves, and any time he gets one of those reenlistment bonuses, I'm like, yes. Like, we are going to go on a trip. We're going to pay off this debt. Does that ever happen? No. 

 

I don't even know where it goes, but it never happens that way. But I think about some of our members that may be in the same situation getting those bonuses. What types of advice do we give our members when it comes to those extra funds that we didn't plan for? 

 

BOB FRICK: Well, let me jump in. There's something called mental accounting, and we tend to put things in different accounts in our brain. Even though all money is the same, we discriminate from one charge to another account. And what you need to do, a great trick to getting that is, let's say you're going to get a bonus, like a reenlistment bonus, or I just started collecting on an annuity. 

 

And I could have sent that annuity right into our checking account, but what I did is, I created a separate savings account with my Navy Federal. It's so easy to do. Retirement Savings. And so I just got my first check, and it was deposited right in there. And then I put it on my page, so I'll never see it unless I'm looking for it. So that's a great way of creating a mental discipline for yourself and sequestering money that you get. And it works like a charm. That's all I can say. You may think it's a trick, but it works. 

 

BRANDI GOMEZ: So coming from your side of the house, Thomas, say a member calls and they get this bonus. What are the types of things that our personal financial management team is going to tell them? 

 

THOMAS RACCA: Yeah, so we're going to look at two or three key things. First off, what does the debt look like? Is this an opportunity to get out of some high interest, or long-term bills that are weighing them down and are hampering their long-term financial growth? If there's no bills that need to be paid off, paid down, then we're going to look at an emergency fund. And Bob made a tremendous point talking about the mental accounting. 

 

And by creating the habit of saving first, getting out of debt, making sure that you have an emergency fund, that's really step 2 to a long-term positive financial outlook. And then if there's already an emergency fund in place, that's when you start looking at step 3, and you start being able to build up that mythical cushion. 

 

That's when you're reaching out to NFIS or whatever brokerage of your choice. And that's when you have a little bit more money to start to separate yourself from your friends and family, and be able to really set yourself apart long term financially, by making solid financial decisions today. The miracle of compound interest really is going to be a difference maker in helping you reach your financial goals in the long term. 

 

BOB FRICK: Yeah. The idea of getting yourself out of debt and saving, it may only be a difference of a few dollars in debt and a few dollars in savings, but it changes your mindset, because once you get that cushion, you want an even bigger cushion. And we're talking about mental accounting. 

 

And the best example of that is a guy in a casino, and he goes up to a high roller and says, hey, man, could I borrow $200. My wife's upstairs in the room and I need to buy medicine for her. The high roller says, you're carrying around thousands of dollars worth of chips. And the guy says, hey, I got gambling money. That's how people think about these things. They think about money that they're spending on recreation or in ways that they absolutely don't need, and they can't seem to put that money over into necessities. 

 

And when I was at Kiplinger's, we dealt with some people who were like that, who were spending exorbitant amounts of money sending their kids to private schools when they're going deeper and deeper in debt, when they had great public schools nearby. Or that the guy had always wanted a tricked-out Cadillac, and he finally bought it, but the payments were crushing him. But that's not a necessity, and you know, sometimes, you have to give those things up to cross that margin from being a debtor to a saver. 

 

THOMAS RACCA: Yeah we saw a lot of that, and it really came to light a lot more during the pandemic. And we saw folks that were working in particular industries that had been more or less recession-proof, and all of a sudden, home markets were drying up. And folks that we had never seen have any kind of financial hardship, they were coming to us and we were looking at the numbers. 

 

And you might think it's cliche to say, you don't need the boat, you don't need the private school, but when you're making out your budget and you're actually putting the pencil to paper, or the decimals to Excel, or whatever mechanism it is you're using for tracking, we saw some conversations that would tug at your heartstrings. 

 

We told a lot of folks, consider getting a roommate. Consider moving back in with family. We saw young adults, young adults in some cases with kids, and just looking at their finances, it was, hey, this is going to be difficult to say, but the advice for you isn't give up Netflix for the month. The advice to you is going to be sell the car you bought. Take on a second job. Get into the gig economy, or maybe reach back out to mom and dad and talk about pushing your plans back for a year or two, especially with such an uncertain future 

 

BOB FRICK: Yeah, that's a terrific point. You know, we can talk about small-ball things, and in some cases, that's all that's needed. But sometimes, you need to hit a triple. You need to hit a home run. You need to make these major changes, and it's tough to see sometimes. 

 

I remember when I was working as a journalist and we had our two younger kids. And I really wanted to put money away for them for college, and we were just getting by on my salary as a newspaper editor. So I started editing books on the side and doing writing projects on the side, and I put that money away for them in a fund, actually in a college savings fund for them, when they were young. 

 

And it didn't pay for all their college, but it paid for a couple of years' worth. And it meant I gave up a lot of golf, which at the time, really hurt me. But you got to do what you got to do. And a little bit of discomfort and giving up some things, and maybe working a little bit harder or making a lifestyle change, sometimes that's needed. 

 

BRANDI GOMEZ: You took the words right out of my mouth, Bob. I was going to say, sometimes, I feel like it's that hard pill to swallow when you have to make the big lifestyle change in order to keep things afloat. 

 

BOB FRICK: Yeah, but it's just temporary. I mean, one of my daughters just got married in September. And so her husband's in college getting a graduate degree. She has a good job in the medical field, and they're thinking about, well, when are we going to be able to afford a house. And she just got, hopefully will get, the $10,000 break on her tuition. 

 

And so I asked, you know, what are you going to do with that money, sweetheart. And God bless her heart, she said, we're putting it in a house fund. And it's like, they could use that on a really nice honeymoon, but they're not. Now, she may just be telling that to me because she knows I'm a finance guy. 

 

If they make some sacrifices like that over the next three years while he gets his doctorate degree, they'll have enough money for a down payment. They know where they want to live. So they're are deliberately dialing back on their lifestyle and planning for these big things in the future, home, family, that sort of thing. 

 

BRANDI GOMEZ: Keeping that end goal in mind, you all touched on this a little bit, but I want to circle back to when life happens, when the unexpected, a child gets sick. You have to care take for a parent, car breaks down. Let's talk a little bit about how we can be prepared when we have those unseen expenses. What can we do? 

 

THOMAS RACCA: Something that Bob talked about early in the episode was creating with two different accounts and making behavioral changes, creating good financial habits. And life's going to happen to all of us, certainly. And if we create that habit of saving at a young age, then when life happens, it seems to rain a little bit less. 

 

One other thing, and I want to piggyback on what Bob just said, because I think it plays out here as well, when you look at where your money is going, so many times, the best question to ask is why am I spending money on this, and looking at what's the real cost and what's the real function of different things. 

 

If you need a vehicle, it's to get from A to B. And a 10-year-old car will get you there just about as well as a brand-new luxury vehicle. Talking about the higher education costs, and I think we've seen time and time again that the return on investment, unless you're going to one of the Ivy League schools, the difference in tuition between a tier 2 and a tier 3 school, you don't see that money again. And we say we're doing it for the kids, but so often, the parents are doing it for themselves. 

 

BOB FRICK: Right, right. Yeah, that's so true. Let me add to what Tom has said. You know, shelter costs, what you pay for your mortgage, what you pay in rent, are really important, and are normally the biggest part of anyone's budget. So you can make some changes there. If you own a house, you can rent out a room in your house. 

 

Or something that I always recommend, that a friend of mine, a retired banker taught me, always have a home equity line of credit line at the ready in case you get into those situations, like you were talking about, Brandi. Yeah, I know we're a credit union. I know we make those. But I've had this philosophy for years and years. Have a home equity line of credit in your back pocket for those emergencies. It's a good source of relatively low-interest-rate credit. 

 

And again, shelter costs. Thomas mentioned this earlier. Sometimes, you're going to have to move back home. My son-in-law, as of a month and a half ago, he's living with his parents now, and that's a good decision on his part because he's an army veteran, and he's used his GI benefits up at this point, but used them well. And he's getting his PhD, and yeah, they have a place, but he can live with his parents and save a lot of money. 

 

It's not something you want to do, but when you're looking, when you've got the goal in mind, you know, that prize of owning a home and starting a family, it's a small sacrifice to make. And I've met his mom and dad, and they're really nice people. So it's not that much of a sacrifice. 

 

BRANDI GOMEZ: I think it's also-- because some of my friends are in similar boats where they're still living with their parents, and for me, it's, well, who cares what people think. If having to live with your parents and living outside of what we consider to be a norm, and buying the house and being the next step, or getting married, I mean, do what's best for you. And I think that if financially, living with someone else is the best thing to do, then by all means. I mean, at least you have someone to help you cook every now and then. I think that's a benefit. 

 

So let's talk a little bit about Navy Federal. So personal finance management. Thomas, can you tell us a little bit more about that? You don't necessarily have to be in what we would consider like a wallet crunch for them to call you up and ask for assistance. So how does that work? 

 

THOMAS RACCA: Yeah, Brandi, so there's a lot that can go into each individual's situation. In personal finance management, it is a complimentary service that we offer to any one of our members. And if you are interested in having a conversation, you can go to NavyFederal.org/PFC, and you will find a helpful list of resources, very similar to the things that we talked about today. 

 

And you will see an application, a link to an application, you will have to log on to your NFL account to fill them out. Or you can call in. Our number is listed on that link as well. And you can sit through a counsel, with a certified financial counselor. It takes about 25, 30 minutes. 

 

And I'll tell you the biggest takeaway, maybe two takeaways with this. As we were doing the preparation for this podcast, and just making list of item after item that I would love for everyone to be able to know and hear, the truth is what we've found is that past two or three pieces of actionable advice, people really kind of stop retaining beyond that. 

 

So the primary exercise when we're sitting and going through a counsel is, we're going to partner with you and your financial success. And the first step of that is saying, do you know exactly how much you're making week to week? Do you know exactly how much you're spending month to month? And education is really the first step to being able to control your financial destiny. 

 

And if that means life has happened and you're trying to get it back under control, if that means you're just starting out your financial journey, if you're starting to see the storm clouds gather, but you want to be able to batten down the hatches and take the right steps. It really doesn't matter where you're at. I can't recommend speaking with us highly enough. 

 

And you're going to get a personalized review of your situation, whatever it may be. And you're going to get some individualized, personalized suggestions that are going to give you the opportunity to improve your financial well-being 12 months from now. 

 

BRANDI GOMEZ: Love that. Unique to each person's situation with actionable items that they can actually do to improve their finances. All right, Bob, Thomas, what have I missed? Is there something else that we want to make sure our listeners get from this podcast? You have been such a wealth of knowledge, so thank you for everything you've shared. But want to make sure, anything else that you would like to share with everyone? 

 

BOB FRICK: Well, there's something that I've been talking about lately, and it's the idea that this moment in time, fall of 2022, is not the best of times. We have inflation, which is tough. People are worried about recession. There are a lot of pressures. 

 

The trick for success, financially and otherwise, I think, is think of your future self. What's the situation going to be like a year from now, two years from now? I can guarantee two years from now, you're going to be in a better position to buy a house. Home prices will be down. Mortgage rates will be down. I shouldn't guarantee you, but that's very likely. 

 

Think about your job situation a year or two from now. We're not always going to have this great jobs market that we have now. You really want to lock in a good job and kind of start setting in roots there so you're not last hired, first fired. Think about what your future education is. What skills can you gain? 

 

I've talked to veterans, and I talked to them about how they'd use the GI Bill. And some of those benefits are still waiting for them to use, and they should at least have a plan on how they're going to use those, because if you leave them on the table, you're going to regret it. And I've spoken to some veterans who have wished that they had been a little bit more aggressive in using those. 

 

But this whole idea of future self, in times of stress, we only tend to think of the here and now. What we need to do is take a breath, kind of leave our emotions behind, and plan for the future. When we do that, not only are things going to look better, but we can start making moves now that are going to set our future selves up for financial success. 

 

THOMAS RACCA: I think that's very well said, Bob. So much of getting started on being financially successful feels overwhelming. And so often, people have a tendency of just throwing their hands up and saying, I'm going to do what I need to do today, especially if I'm in a financial hardship. I'm going to do what I need to do today to put food on the table for this week. 

 

And I don't want to make it sound like it's either one extreme or the other, but the truth is, everyone really is in a very unique situation. And the best advice that I can give to anyone out there is, taking care of your financial well-being is no different than taking care of your physical well-being. 

 

If your body is giving you warning signs, you talked about your exercise equipment, Brandi, and how important that is. You have warning signs from your body when something goes wrong. You have warning signs in your financial life when things start going wrong. But an ounce of prevention and both really is worth a pound of care down the road. 

 

So taking those baby steps today are going to give a tremendous return on investment years down the road. So on your physical well-being, if you are just trying to get in the habit of showing up to the gym and going for five minutes just to build the habit, I would say for your finances, start with $5. Put $5 in a savings account and do that until it becomes automatic. And then start to raise it just a little bit at a time. 

 

BOB FRICK: Yeah, that's terrific advice. And when I mentioned inertia before that we get, inertia in paying for things we really don't need, inertia works both ways. You can make inertia work for you. And so if you just do the automatic deduction, the more automatic things you do, the better, so you don't have to make that decision every time. 

 

If you can just do the automatic deduction into savings, and do other things for yourself automatically, saving for retirement, saving for a car, saving for a house, once that inertia sets in, it's hard to stop. And so again, you can have inertia working for you instead of against you. 

 

THOMAS RACCA: Brandi, the goal isn't to be able to go out and buy the flashy new sports car. The goal is to be able to take steps that when life happens, that what you do today makes it a little bit easier to process and get through it next time you have that experience. 

 

BRANDI GOMEZ: Well, Thomas, Bob, thank you so much for joining us today. Like I said, you've been a wealth of knowledge. You've shared personal experiences. You've made a topic that can certainly be difficult to talk about more enjoyable. So appreciate your time, everything you do for us. And hopefully, we'll have you on again soon. 

 

BOB FRICK: Oh, thanks, Brandi. It's been great. 

 

THOMAS RACCA: Thank you, Brandi. Appreciate the time today. 

 

[MUSIC PLAYING] 

 

NARRATOR: Navy Federal Credit Union is federally insured by the National Credit Union Administration. This podcast is intended to provide general information, and shouldn't be considered legal, tax, or financial advice. It's always a good idea to consult a tax or financial professional for specific information on how certain laws may apply to your individual financial situation. References to and participation with the military community does not constitute organizational endorsement. Navy Federal is an equal housing lender. Navy Federal Credit Union. Our members are the mission.