In My Finance Era®

Paulo Costa: the positive aspect of money and emotions is one thing that I don't think people talk enough about.

Ally Salus: Let's talk about it. Should you be saving money or paying off debt? Because doing both at the same time can sometimes feel like running in place.

Ally Salus: Welcome back to in my Finance Era I'm Ally. This is the podcast where we break down the real money decisions, you're navigating to help you take your next best step. Today we're getting into one of the biggest tensions in personal finance paying down debt versus building savings, and how to prioritize what matters most for you in your situation.

Ally Salus: I'm joined by creator Mikey Caloca and money researcher at Vanguard, Paulo Costa. Excited to have you both here.

Ally Salus: Thanks so much for joining us.

Mikey Caloca: Thank you for having me.

Paulo Costa: This is gonna be fun!

Ally Salus: Very excited. Mikey, you invest in yourself and your future. You've been on a paying down debt journey and you're really passionate about your finances. What makes you so motivated to pay off your debts and to think about your long term financial strategy?

Mikey Caloca: Well, passion, I guess about a lot of different things at the moment. Right now, my biggest thing is my house. Like my house is like my my pride and joy. I'm just like, I'm like waiting to see it finished being built. But as far as like, passion goes, I think just like it was, it was actually very difficult for me at the beginning to be passionate. It's when you don't really know what's going to happen, the discipline that comes with it, the baby steps that comes with it. So when I first started, I wasn't as passionate. But as I as I've gone on and I'm seeing things kind of like my debt go away and now savings going up, I think that's the momentum is kind of what helps build some passion around that.

Ally Salus: Yeah. And you mentioned to kind of very relatable like building that momentum. And how do you kind of set forth on a great strategy that works for you? That's why I'm so glad we have Paula with us today, a researcher dedicated to learning, sharing all things financial debt saving strategies. Paulo, thank you so much for being here.

Paulo Costa: Thank you. It's a pleasure. You know, I'm one of those creators. I study how people make money decisions. And it's really fascinating to see, you know, the theory marrying with their reality. So excited to be together.

Ally Salus: Yes, maybe. Let's start when I think about kind of debt paying down versus saving. Right. And this is as a larger, broader theme, I think about emotions.

Ally Salus: And sometimes I feel like talking about money can be super emotional, it can be stressful and difficult to talk about, but it can also really be something that's very energizing and exciting depending on what stage you're at and where your mindset is. We recently ran a Vanguard survey, and it showed that 42% of 18 to 34 year olds see investing as a way to make a difference in the world and support values that they care about.

Ally Salus: So lots of emotion there, both from a positive and a negative. Paulo, can you talk to us a little bit more about the emotions with paying off debt and your saving strategy, but also how you can, work it together with logic when making your financial decisions? That's a great question, because usually when we talk about money emotions, they really tend to be negative, right?

Paulo Costa: People think about financial stress. You know, if you look at the surveys, you know, what we see is that most people in the U.S. feel financially stressed. You know, there is a stat that the average American spends between 7 to 8 hours every week thinking about money. So that's a constant, you know, cognitive load, the stress behind money. But then there's the other side of it. And Mike this mentioned this, which is you know he's really excited about his house. And the positive aspect of money and emotions is one thing that I don't think people talk enough about. You know, the, you know, momentum that you build when you're doing something positive. Maybe you're saving for your child's education, maybe you buy, you know, buying a house, a building, a house, and that positive, you know, emotion is one of the things that I think is really underrated. And we should be talking more about. And the logic behind, you know, money is really what's going to propel you to, you know, meet the moment and make the financial decisions that will be helpful to you in the future

Mikey Caloca: And I really wish, like some people knew, just, like the tiny little wall between like, knowing and not knowing. Like for me, when I was, like you said, like the bad stress, I guess, like stressed out about finances, as you said, 7 to 8 hours, I think about probably seven, eight hours a day. So a week is insane. But for me it was it was thinking about it and being stressed and in a negative sense. But just a little hurdle that I had to take to start caring about it. That made it more positive. And now I'm like, you know, I'm excited about it.

Paulo Costa: I'm just like you. So, you know, I have a PH.D. In money, you know, and that's I think about money all the time. Yeah. You know, from the moment I was born, I was thinking about money. And I think one of the things that is, really interesting about this is that, you know, our experience is shape how we, you know, think about money. Like, I grew up in Brazil and, you know, I was low income back then. And, you know, that scarcity mindset when it comes to money, you know, what's one thing that defined, you know how I grew up with money. But then, you know, being a financial professional now and realizing where that comes from and what are the things that I can do to feel better about money and be able to communicate that to people is, you know, one of the greatest gifts.

Mikey Caloca: Love that.

Ally Salus: You both mentioned this kind of idea of control. So growing in your education and understanding what you can change to get you to the life that you want, let's dive a little bit more into something that we can't control, which is prioritizing debt we might have. How do we approach the prioritizing paying off debt? Which one do we start with, and what are some of the things we should know about that when we start on our kind of debt pay down journey?

Paulo Costa: I love that question, because one thing that I hear so often is people telling me money controls me. And they usually come from a situation in which when people have high interest debt. And this idea that this debt is working against me and, you know, a great question is how can we help, you know, making those people feel better?

Paulo Costa: And I think one of the things that comes top of mind is paying your high interest debt as fast as you can. And when we are talking about high interest debt, we thinking about, you know, credit cards, payday loans. If you have that, that is above, you know, 8%, that's usually considered high interest debt. And by all means, if you can, you know, pay that down as quickly as you can because that compound interest is working against you the whole time.

Paulo Costa: So making sure that you, you know, getting rid of that, you know, high interest debt is really, really important as a first step to, you know, making you feel more secure and taking control of your finances instead of money controlling you, you control your financial destiny.

Ally Salus: Yeah. And, Mikey, you mentioned in the beginning kind of your your debt paydown journey. And when you started, you were you were nervous or apprehensive. Were you thinking about any of those things in that kind of prioritization model, or did you do something differently and hearing it how does that change your perspective?

Mikey Caloca: Yeah, I mean, frommfrom the outsider's perspective, because I know there's going to be people watching this that are going to hear high interest debt and they're already freaking out.

Ally Salus: Yeah.

Mikey Caloca: Like me personally, I needed to I think everybody else to do the same thing is you need to take the initiative to look at your finances. I think that's the the one step everyone's missing out on is they're just not wanting to look out of fear and the negative emotion, I think when I decided to look is when things started changing, because now I was more educated on my situation. But one thing that I personally did, I micro paid. I call it micro paying towards my debt. So obviously with the momentum of my content, I was able to make bigger payments over time.

Paulo Costa: Mikey, I have a point about this because you know what made you so open to talk about your finances? Because I've seen you talking about debt and paying down debt and saving for your house, because one of the that I the way that I like thinking about emotions that are two things. One is how you feel.

Mikey Caloca: Yeah.

Paulo Costa: And then the other part is how other people make you feel, you know is this internal and the social aspect of it. But how did you, you know, become so courageous to talk about finance so openly?

Mikey Caloca: Yeah. Well, I mean, it wasn't easy. I'm going to be honest with you. Like when I before I started making content, I was very like I wouldn't say adamant, but I was a little bit like nervous going into it because people could take it the wrong way. Like people can look at money in a negative light 100% of the time. So like when they hear the word finance or just like budgeting in general, it's like a trigger word. So for me, I was I was never able to find somebody out there that made me feel comfortable enough to start getting better with money. So I wanted to be that person for other people, kind of like an older brother, like, hey dude, it's fine. Like, “I know you don't want to look at it, but just look at it, dude.” Like, “Who cares, you know?” So that's the position that I took. And I mean, it's worked for me so far.

Paulo Costa: I was giving a talk once and I was talking about budgeting because as we say, it's a tool for awareness, right. Where do you stand? And this person came to me afterwards and said, “You used the forbidden B-word.” And this idea of budgeting being a tool to restrict you, but it is not, is a tool for you to understand where are you and where could your money be going? And then making sure that in the end of the day, you know, you really know. “Well, did I spend too much on something” or the other aspect of it, which is when we talk about budgeting, we talk a lot about, you know, cutting down expenses. But there is also the other aspect that Mikey, you embody. So you can also think about making more money. And how can I do that, like through my education or through a side gig.

Mikey Caloca: Oh my Gosh

Mikey Caloca: Yeah.

Paulo Costa: You name it. But budgeting is, is not only a tool to restrict you is also to empower you to understand what your financial situation is and where you can go.

Ally Salus: I love the budgeting tool and maybe we can take it to kind of some other specific methods that people can use or learn or look more into.

Ally Salus: And we talked about this debt and the way that it changes your kind of emotional logic about, your finances and being able to be an investor. In our recent Vanguard survey, we also learned that 32% of 18 to 34 year olds feel that they have too much debt to be considered an investor, which is just a crazy statistic.

Ally Salus: And so maybe we can dig in a little further now that we know how to prioritize those debts, how should we pay them down? What are some methods that we can follow kind of beyond the budgeting that we talked about already? To pay down our debts?

Paulo Costa: When it comes to budgeting, Mikey, what's your favorite budget strategy? Because I have thoughts about all of them. But I want to hear, you know.

Mikey Caloca: Well, okay, so this is where people are going to start hearing French because like, I'm going to start saying numbers and people are going to be like, what the heck is that? I've, I for some reason, I've always enjoyed looking at money like a pie, almost like percentages like the 50, 30, 20.

Mikey Caloca: Yeah, that's what I use. So when I get paid, I take a chunk of it and I put it towards my needs, my bills. I take a chunk of it and I put it towards my, my spending. You know, the things that I should be kind of making myself happy with. And then my, my future, my investing, my savings,

Ally Salus: when I started using that method, was it hard?

Mikey Caloca: Oh heck yeah.

Ally Salus: Like when you owe like when you started on your budget journey, was it tough to get into using the 50, 30, 20 and like, how did you talk to yourself about, “No, I can do this. I can make it happen.”

Mikey Caloca: Yeah. When I got paid, I saw like whatever, $1,800 hit my account. I didn't want that $8,000 to go away. That $1,800 looked real good right there on my checking account. But then I had to take a piece out for this, take a piece out for this, and then I'm left with, like, this much left. And I'm like, God. So yeah, it was very difficult at first, but it's like, that's the thing is that I don't think people really, truly understand that budgeting is not meant. Like you said, it isn't meant to restrict you, but it's meant to kind of like lay out the groundwork. And then once you get it going, it's almost like you're on cruise control. Like everything is basically like set up, like basically for yourself. You're setting everything up for yourself.

Paulo Costa: The reason why I asked is my favorite method is pay yourself first. You know, after the money hits your account, before you do anything you set aside, you know how much you want immediately to then do you know to your passion, you know, to save money or to pay down debt. You know, and I think one of the things that it you know, it's so important, I think, for people to understand is really the point that, you know, paying down debt is actually saving money. And the reason why, you know, I like that people understand this is that paying down debt comes with, you know, at times shame. People is like, “I have debt and I shouldn't have had that in the first place.” And then, you know, not all debt is created equal, there is good debt there is bad, debt. And we can talk about the distinction about debt. But one thing that is so important for people to understand is when you have debt, when you set aside money to pay debt you both, you know, saving money because you're not spending that money, you're putting that towards your goals. But the second part is you also saving on the future interest in that, debt. So this idea that, you know, saving money is a positive thing and paying down, debt is a nag, you know, having debt is something that we really the stigma needs to end. You making progress towards your financial goals both ways. And the way that I would frame this is you can do actually you know both if the high the interest rate is high paying down that debt but then you can think about doing other things maybe meeting your employer match building or emergency fund. You know, there is so many things that you can be doing while are you paying down debt. So it is not either or. You can do both. But the important thing is creating the capacity through budgeting. Using the forbidden B-word to make sure that, you know, you know, where your money is going and you know the next steps that you are taking..

Mikey Caloca: Immediately.

Ally Salus: Yeah, so important and so hard to sometimes make that distinction Because you're right, there's this like negative aura around that. And oh my gosh, I have to pay this off. Did you ever feel like that when you first started paying down your debts? Like, oh my gosh. Like, did you ever talk to your friends about it? Your followers about it. Did you hear this from other people as well?

Mikey Caloca: This kind of negativity around debt and feeling like you have to pick one or the other? I mean, yeah, it's shameful. I mean, I think the I think the really sad part about it is, is like the way that everything is sort of set up for us is like, you know, you go to school, you're told, you know, go to college, you get your job. Sadly, things happen in life, where I wasn't able to get a job after school and I was in student loan debt. So like, there's a bit of shame on it. I'm over here drowning in debt. I have 20,000 of it. And I'm sure there's so many of you guys, I might have more. So I think it's there is a bit of shame behind it.

Paulo Costa: I think you expressed the point that not all debt is created equal. One example is, you know, debt to fund education, right? You are, you know, increasing your human capital. And by that I mean your capacity to make money for the rest of your life. You know, that's one asset that doesn't show up in any spreadsheet, right? You know, we don't look at Mikey and say, “Oh, your human capital is this much.” You know, that doesn't happen. Then there is the other type of debt to fund consumption. Well, maybe I shouldn't have gone to that, you know, expensive French restaurant. And I didn't have the money to pay for that. Well, you know, that type of debt to fund consumption, you know, that's usually going to be high interest. If you can't pay it, you know, probably it's not a good idea to start. So and I love the idea, you know, that you mentioned in that in talking about debt, you know, people can feel ashamed. But in the end of the day, you know, you just said, you know, you did it to fund education, but then you realize, wow, you know, if I didn't get a job, I need to do something else. And I think this idea of, you know, taking control of your finances, understand your situation and then take the next step that is going to help you the most. I mean, it's. it's super analytical and it makes sense.

Mikey Caloca: Yeah.

Ally Salus: Yeah. So we've covered a little bit on how to prioritize your debt, how to pay down some things. We can get started some different methods, which was really helpful.

Ally Salus: Maybe we pivot to this idea of an emergency fund. So once we've got our debts kind of under control, we're feeling good about our paydown strategy. What else should we start building with our savings? And is it the emergency fund that comes first?

Paulo Costa: Yeah. So, I mean, the way that I like to think about, you know, taking control of your money and your finances is probably the highest, you know, benefit that you can get is meeting your employer match if you work. You know, a lot of people say, you know, that's basically money that you get from your employer, so you should take advantage of that. Then the second one would be paying down the high interest debt, you know, probably the rule of thumb above 8%. You should pay that down. So some research that my team did last year, is that the number one thing that you can do that is associated with increasing your financial well-being the most is actually just saving $2,000 in emergency savings. And you know, this is one of the things that we saw that when people had that safety net just there, you know, was associated with reducing the amount of time they spend thinking about their finances that we talked to in the beginning. So that cognitive load of, you know, spending less time thinking about your finances because you have that buffer, you know, I still remember when I fund my emergency savings the first time, when I was starting my PhD, like, stipends in different schools. And one of the schools said, you, you know, we cannot increase, you know, your stipend every year, but we can give you $10,000 right now. And then, you know, after taxes that came down to me as $8,000. I remember that day that, you know, that money hit my account. And I had, you know, you know, I was just, you know, my elbows looking at those $8,000. Oh, my. You know, my checking account and just thinking about, “Oh my God, I'm so rich.” You know, Yeah, but because, you know, I mentioned that I grew up low income, but that meant that if something happened to my parents back in Brazil, I could take a flight down there. No problems. And, you know, many years later, that did happen. But, you know, that mental burden, you know,

Mikey Caloca: Sense of security.

Paulo Costa: it really is.

Paulo Costa: Mike, how did you feel when you first, like, funded your emergency savings? And, you know, how did that feel to you?

Mikey Caloca: I mean, I mean, honestly, it feels great. It's like a security thing. I mean, it's interesting you said $2,000 because nowadays, and I'm not saying this is a bad thing necessarily, but people wouldn't typically say 3 to 6 months of expenses could be a good emergency fund. That's kind of what you hear on the on the internet these days. 3 to 6 months of expenses, a lot of money. Like it's a lot of money, especially with expenses going up. It's very difficult to say that much money. So I think $2,000 is much more attainable for some people. But me personally, when I had an emergency fund, dude, I was like, you. I was sitting there like,

Paulo Costa: Yeah!

Mikey Caloca: You know, I was happy. But I mean, it's, it's just a sense of security. It's like knowing, like you said, your family, me, my family, my entire pops, if whatever. Like, you know, things. Life just life's sometimes.

Paulo Costa: Absolutely. And if you want to be disciplined, one tip for a lot of people, because of the other question that we get a lot is like emergency fund, I have my $2,000 and I want to build it 3 to 6 months. How can I make sure that that is put in a good place? One tip is you can actually use a Roth IRA for that as well, because, you know, contributions and only contributions from a Roth IRA can be withdrawn like tax and penalty free. So it's really one way where people can have, you know, that money invested for something that is more long term. But at the same time if they need it they can tap that money as well.

Ally Salus: Yeah.

Paulo Costa: So there is the opportunity to be doing, you know, more. That's why so important to be, you know, financially educated. Because there are ways in which you can optimize things and do two things at once, you know, have retirement savings, but also at the same time, emergency savings. So making sure that you informed you grounded. I think that's one of the things that really can help everybody in the long term.

Ally Salus: You mentioned tire pop and different things. Is there ever a time like, or how do you figure out when to spend your emergency fund? Right. Because then we kind of get this emotional tie to it. We're like, “Oh yes, alright. It's there.” How do you know when to rip the Band-Aid off, though, and spend it on a true emergency versus maybe on something that might not be emergency and more of a want than a need? Have you ever found yourself in that situation?

Mikey Caloca: Yeah. I mean, like, if I'm craving, like, some Korean barbecue, that's not an emergency. Yeah, like like, you know, that's it's an emergency that I'm craving that. And I should go get it, but doesn't mean I'm going to tap into my emergency fund to pay for it. But if my tire pops and like, if I ask myself, was I expecting this and is this something that I have to get fixed immediately, then yeah, I will dip into my emergency fund and pay for it. That actually just happened to me like a month ago. I was driving tire popped, don't know what the heck happened and again it tires my car.

Paulo Costa: I love that too by the way.

Paulo Costa: And, I love the way that you framed. You know, some people just say so easily, you should have 3 to 6 months saved. And it's not that easy. And I mean, the two things that we, you know, like talking about here, Vanguard is number one is that, you know, start small. So, you know, build up to those $2,000. And the way that I build it up is that I got a windfall. Maybe you get a tax refund. And that's one way to, you know, capturing that windfall and making that into your emergency fund. But the second part of the 3 to 6 months is that it's something that you build up to. Because otherwise you won't consume anything you own, you know. So I think this idea that it's something that you like slowly build up to. Yeah, it's just really important. And the other thing too is, you know, like I said, “life life’s right?” So sometimes, you know, people will lose jobs or they have to cut down, you know, expenses because something happens. people's, income also varies so much. Right? Mike, you are an influencer. You know, tell me a little bit of, you know, how does that change? You know, month to month, week to week?

Ally Salus: That’s a great point.

Mikey Caloca: Yes.

Mikey Caloca: I mean, dude, we're talking between 5 and 4 figures. Some months it can go like 10,000 a month. It can go a thousand a month. I mean, you never like you. You really never know. But I think like understanding that there is volatility I will, you know, live accordingly to that. Like when I said if I just Korean barbecue in mind, I maybe I won't eat it every week just because I know that something could happen in my life. But yeah, like there's always going to be volatility. There's always going to be uncertainty in people's lives. But that's like you said earlier that this is like more like the negative. But there's also the positive arrays that work. Right. You might get a new job like you can make a 10,000, $20,000 now new income. Maybe you got a new job. I have no idea. So there's always there's always a positive to the negative. But understanding that life can change and just adapting as you go, living and understanding that if you have an emergency fund, you're covered.

Paulo Costa: Absolutely. And that's why for us, you know, understanding more and more that our income like varies month to month and expenses. Obviously, that goes without saying, you know, sometimes, you know, you go to a vacation and then sometimes, you know, it's talking about spending money, it makes me nervous, you know? But that idea of having the buffer in place, you know, and, you know, we are thinking about, you know, the $2,000 that we just talked about building it up to likes having a buffer of, three months of expenses. So having a buffer of three months of expenses, making sure that you have that, you know, safe ground and making sure that you both, you know, have that, you know, probably a high yield account, making sure that you're getting interest for that money.

Mikey Caloca: Yeah.

Mikey Caloca: I hope.

Mikey Caloca: I hope it's on a high yield account because my gosh, people are losing out on interest, man.

Paulo Costa: Yeah.

Paulo Costa: Absolutely. So making sure that we are making progress towards our goals. Yeah. But you know having your finances under control prepare for the unexpected. That just relieves so much mental stress. And that makes a big difference. You know, Mikey, you know, tell me a little bit about now. You know, you are about to reach the goal for your house. How does that feel?

Mikey Caloca: I mean, it feels good. I was in the same position that maybe the person watching this is I was scared, I was petrified, actually. I was drowning in debt, paid off my debt, and I took little brick by brick by brick every day. Daily decisions, a lot of no's, barely any yes’s. But just understanding that, you know, it's it's, it's an over time thing, man.

Paulo Costa: Or you can be scared like I was too. And you go get a PH.d. right here. Or you can do what Mikey did.

Mikey Caloca: Yeah, yeah. PH.d or You make content. You pick.

Ally Salus: We've covered so much all about debt. Kind of our prioritization breakdown of what we should do, how we should tackle it. Some things we can do to pay it off.

Ally Salus: Thank you both so much for being here, Mikey. Any last questions for Paolo before we wrap?

Mikey Caloca: Yeah, yeah. So I hear this a lot. I know that people like we've talked about emergency funds, but right now an emergency fund might not be in the plan for somebody. I don't know, because maybe they're in debt. How can somebody balance paying off high interest debt but also building up an emergency fund? How can they balance that at the same time?

Paulo Costa: I think that's a great question. And it's something that we hear a lot. And one of the things that I would say is, you know, for the emergency fund, start really small. You know, it's $10 a week, $20 a week. Up to you. The other thing that you know, I think people think a lot about too, is, you know, I'm not making enough money. You know, sometimes it's not a question of, you know, I want to do what's right. I just don't have enough. And that's one of the moments that, you know, there is only so much that you can cut when it comes to expenses, right? You know, everybody, you know, have to pay rent, you have to pay a mortgage. But, you know, are they opportunities to make additional money. And use those, you know that additional money to make sure that you funding, you know, your emergency fund and paying down debt. And the other thing too, that is super important is this the separation of what's high interest debt and what's low interest debt. You know, low interest debt is something that you don't need to be, you know, pressed to to pay down. One example is, you know, during the pandemic, a lot of people got mortgages at a 3%, 4%, you know, you know, in the financial market, in a diversified portfolio, like in the long run, that could be something that you could make more money having that money invested, then you would be paying down debt. It is a personal decision. Some people are super debt averse and say like, “I want to get rid of this as soon as I can,” but in the end of the day, what I think it comes down to is, you know, there is a logic behind all of this that I just mentioned, but in the end of the day, use that logic, but also think about what works for you. Starting small with the $2,000 of emergency savings in case something unexpected happens, and then building up to those 3 to 6 months that once again, it will take time. Yeah. You know, you know, building that momentum and the idea that small steps can really go a long way is one thing that I wish, you know, people could take away from this is really you start small, but you really will lead you to something bigger.

Mikey Caloca: You just taught me something, Paulo.

Paulo Costa: Oh, good. That's why we're here for. Yeah.

Ally Salus: Thank you both so much for being here. It was so awesome to have this conversation talk a little bit more. Learn from you, Paulo. Get your expertise and your experiences. Mikey, thanks again for for joining us.

Mikey Caloca: Thank you so much.

Paulo Costa: Thanks for having us.

Ally Salus: That question of whether to save or pay down debt isn't always straightforward, but hopefully today helped you think about it in a more personal and practical way. If you'd like to share your thoughts or questions, you can connect with us on social media.

Ally Salus: Send us a message. There, and for additional resources, head over to inmyfinanceeracom. Thanks for listening. We'll see you next time.