NerdWallet's Smart Money Podcast
Simple Steps to Budget Better and Manage Credit With Confidence
Thu, 16 Jan 2025
Learn how to create an effective budget and manage credit responsibly to build a strong financial foundation for 2025. How can you create a budget that works for you? What are the best ways to use credit cards responsibly? NerdWallet personal finance expert Kim Palmer joins host Sean Pyles to discuss budgeting strategies and smart credit management to help you build a strong financial foundation for 2025. They begin with a discussion of budgeting, with tips and tricks on choosing the right budgeting method, tracking expenses effectively, and overcoming common pitfalls like unexpected expenses. Then, Sean and Kim discuss credit card management and how to use credit responsibly. They explore the importance of monitoring transactions, strategies for avoiding overspending, and tips for keeping your credit utilization low to protect your credit score. They wrap up their conversation by sharing actionable advice for managing debt and improving your credit health over time. Enter your monthly after-tax income into NerdWallet’s free budget calculator to create a suggested 50/30/20 budget: https://www.nerdwallet.com/article/finance/nerdwallet-budget-calculator Here are NerdWallet's picks for the best budgeting apps, broken down by what works best for different needs: https://www.nerdwallet.com/article/finance/best-budget-apps In their conversation, the Nerds discuss: how to budget effectively, creating a budget, 50/30/20 rule, zero-based budgeting, cash stuffing, best budgeting apps, credit card tips, responsible credit card use, credit utilization, how to manage credit, credit card debt help, financial planning, credit score improvement, debt payoff methods, snowball method, avalanche method, NerdWallet app, best apps for budgeting, income tracking, expense tracking, managing credit card debt, avoiding overspending, building credit, financial goals 2025, smart financial habits, credit score tips, common credit card mistakes, planning a budget, household budgeting, monthly budgeting tips, using credit wisely, and setting financial goals. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [email protected]. Like what you hear? Please leave us a review and tell a friend. Learn more about your ad choices. Visit megaphone.fm/adchoices
Chapter 1: How can you create a budget that works for you?
All right, everybody, raise your hand if one of your promises to yourself in 2025 is that you're going to follow a budget. Hey, look at that, I see lots of hands in the air. Just kidding, I can't see you. But there are probably quite a few of you who've made that promise to yourself. Today, we're going to help you keep it, and we're going to make sure that your credit life doesn't get in the way.
The main caution to watch out for with credit cards is overspending. Credit cards can just be really tricky because it doesn't necessarily feel like real money. And other than the credit limit on the card, there's really nothing stopping us to keep swiping away to buy what we want.
Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles.
And I'm Kim Palmer.
Throughout this month, we're featuring several episodes to help you get the year started off on the right financial foot, if you will. It's your money in 2025. Kim, you've joined us today to talk about budgeting and credit. And when I say credit here, I mean the credit you use, like from a credit card, as well as your credit scores and credit reports.
Yes, these are two aspects of our financial lives that are so common, but they're also really frequently misunderstood. We are going to walk people through some of the basics of setting up a budget. We'll actually go a bit beyond the basics. And then we're going to have some tips and tricks for layering credit onto that budget.
And that's a really good way to think of it. Know your budget first, then you can figure out how to use credit, aka debt. Of course, we are aware that probably most of the audience already has some credit cards. So we're really going to get into how to use credit responsibly and make sure you're making it work for you, not against you.
Credit is something you really need to actively manage. And one excellent way to do that is... Budget. Budget, exactly. We're going to meld these two aspects together so listeners can really head into 2025 with a really solid financial foundation.
Kim, I always enjoy hearing how my fellow nerds put their advice into practice for themselves. I want to ask whether there's anything you do at the start of the year to help yourself along these lines. Any reviews you do of the previous year or mental exercises to figure out how you're going to budget and manage your own credit life for the coming year?
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Chapter 2: What are the key budgeting methods to consider?
That's exactly right. And I know there's a couple other methods that are appealing to people for different reasons. It's really all about finding the one that fits best for your preferences. But another one that stands out is the cash stuffing or envelope-based method, where basically... You're putting your expenses into different buckets or sometimes different envelopes each month.
You're allotting it out that way. Another method that appeals to people is called the zero-based budgeting approach. Basically, you're accounting for every single dollar when you use that method.
I think your point around personal preference is a really good one. And I want to emphasize that because you have to know yourself to know how you might budget best. For example, I've heard from listeners who have suggested that I personally might like the zero-based budgeting approach in part because of how I have my savings account set up.
Kim, in case you didn't know, I have about 10 different savings and checking accounts, each with its own purpose. Even though I like to have my paycheck distributed to these different accounts, I don't really like to track each penny. At a high level, I know that I have enough money going into each account to cover my monthly expenses.
And I've tried really granular budgeting in the past, but it just does not work for my brain. Budgeting in the macro is much better for me. And I'll also own that I'm fortunate enough to not have to pinch pennies, which of course makes this a little bit more feasible.
I really love your approach and how you break down your savings accounts like that. I've actually heard from quite a few financial planners that I've interviewed over the years that they use that approach too. So I think it definitely appeals to people that like that level of organization. So you're definitely not alone.
Let's talk about some of the budgeting apps out there. Mint was the popular kid on the block, but that's not an option anymore. Can you walk us through some of the other apps that are proving useful to folks wanting to work on budgeting?
There are actually so many helpful apps out there. You have a lot of options. And I think the key is to experiment and to see what works for you because you want to choose an app that you really enjoy opening up every day because that's what helps us stay on track. First of all, there's the wallet app, of course, you can pull up all your spending data, you can get offer recommendations.
There's the YNAB, which stands for you need a budget app that uses a zero based budgeting approach. So it's tracking every dollar. And then there's also honeydew, which basically helps you coordinate if you have a partner that you're making spending decisions with, it can be a useful tool just so you're both on the same page. And that's honeydew, honey d u e.
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Chapter 3: How do you track your expenses effectively?
If there's an error on your credit report, then you really want to try to fix it as soon as possible. And the way to do that is to let the credit bureaus know. Each credit bureau actually lists out the process for correcting an error on its website. Each one is slightly different, but basically you can do it online, by phone, by email, whatever works best for you.
What about the credit score? First off, this is in fact different from the three credit reports. Remind us what the difference is and how you can make sure your credit score is up to snuff.
Your credit score is a number that reflects your history with credit. And that history is what's contained in your credit report. I kind of like to think of it as your credit report is an exam that you turned in. The credit score is the grade that you get. We each actually have multiple credit scores that are given by the different credit bureaus.
And the formulas that make up those credit scores are proprietary. So they're a little mysterious. We don't know exactly how they're calculated, but we can draw some conclusions like the ones we've shared today.
I think that test comparison is really helpful. And I also wanna touch on what score folks should have. There isn't one specific passing score, but some people can carry guilt or shame if they don't have a perfect 850 credit score, which in this case would be an A+, or maybe their credit score is nowhere near 850. The truth is the average FICO 8 credit score is 717. That's a good credit score.
For context, the best rates on loans like mortgages will generally go to those with credit scores north of 740. But also, I think it's helpful for folks to zoom out and think about what they want a good credit score for. If they don't currently have a great credit score, but they maybe aren't planning on applying for a new line of credit soon, I think that's fine.
They can spend some time improving their credit now so it's in better shape when they actually do need to use that credit score.
I think that's a really good point. And it also speaks to the fact that we're talking about numbers a lot and we're not just trying to get ahead just to improve these numbers, but we're trying to achieve some bigger life goals. So I think it always helps to step back and think, okay, what are those bigger goals that I want to achieve? It helps us stay motivated.
Right. I personally am getting very close to paying off my auto loan, which I'm excited for, but I'm expecting my credit score to take a dip after that. I'm going to be very interested in seeing how well I practice what I preach in terms of separating my self-worth from the number of my credit score.
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