Budget Rehab: Can a Family Rebuild Their Emergency Fund and Still Afford the Life They Want?

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0:56Sean Pyles:We talk about budgeting all the time on this show. It's an activity that helps millions of people manage their finances every day. But that doesn't mean it's always easy. So today, we're going to walk step-by-step through one of your budgets to show how it's done.

1:15Sean Pyles:Welcome to NerdWallet's Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Sean Piles. And I'm Elizabeth Ayola. Later this episode, we'll be debuting the first of our budget rehab segments. But before that, our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. Our news colleague, Ana Hilhoske, is back with us to talk about car insurance. Because in all likelihood, a lot of us with cars are going to be seeing some price increases that are beyond what we usually expect.

1:46Sean Pyles:Hey, Ana. Hey, Sean Elizabeth. So an Axios report, which is based on projections from the car insurance comparison site Insurify, found that if the 25 % auto tariffs remain in place, then the national average full cover car insurance could go up by 7 % in the second half of 2025. Without tariffs, it would have been 4%. So we brought in insurance nerd Andrew Hurst to give us the rundown. Welcome to Smart Money, Andrew. Hi, thanks for having me. It's great to be here. So to kick it off, can you start by walking us through how tariffs on imported auto parts directly impact repair costs and in turn insurance premiums?

2:23Basically, claims are going to get more expensive, which is going to drive up the cost of everyone's insurance, even if you don't make a claim yourself. The way that this works, I like to think about a house's plumbing system or something. If you have a blockage, let's say there's soap scum in one part of the house, you might not notice it until later, but eventually you'll start to notice that your faucet drains a little bit more slowly, start to have a slower flow maybe. That's sort of the way the economy works at that level. Tariffs are basically a tax on imports. What that means is when people bring stuff in, whether they're vendors or manufacturers, they're going to pay a little bit of an extra tax on those imports.

3:03That might sound a little bit hard to wrap your head around, but stuff like auto parts are going to become more expensive. That's bad news for insurers. When you or I have to make a claim, they might have to replace your car. In order to replace your car, they might have to purchase a new car entirely. More expensive claims are bad news for us because it'll make our premiums go up. The reason for this is that if you total your car, the mechanic is going to have to source the parts that they will need to repair your car, probably from another country, let's say, probably from a country that's been impacted by tariffs.

3:39They will in turn pass that higher cost down to your insurer who reimburses you for your claim. Your insurer, having paid more money for that repair, is going to pass that higher cost on to you. You can imagine that you can return to that blockage picture again. When something happens in one part of the economy, it trickles all the way down to the other rooms of your houses. So earlier this year, insurers were anticipating stable or even somewhat lower rates in 2025. What's changed in the economic picture to alter those expectations? Tariffs have played a huge part in it. And it's not only the tariffs themselves, but it's sort of the way that they're rolled out.

4:17We've had a lot of going back and forth. It doesn't really work well for companies who are in the business of planning in the long term. Depending on what type of material we're talking about, the manufacturers in the United States might have to put in orders with an overseas plant months in advance. When you have this sort of confusion on the planning side, it makes it very difficult to sort of have a sense of where your expenses are going to be in three months, in six months, in the next year. That really, really is not what you want from a stability standpoint. In the last few years, how have auto coverage premiums behaved and how does that compare to this year?

4:58Generally speaking, the price of auto insurance has been going up for quite a while. You can go back using the Bureau of Labor Statistics data and it shows that prices have been rising steadily. Albeit in the last, let's say, 10 years, you've noticed a pretty different looking slope upwards than the steady stream that consumers might have been used to for decades. I would expect things to continue going up, even if tariffs weren't a matter. It's not just tariffs that are causing this. And we had already seen car prices in general, both used and new, increase pretty significantly in the days after the pandemic began.

5:36So if tariffs stay in place over the long term, let's call it years instead of months, would you expect premiums to hit a crescendo or just keep on building? My sense is that they will keep on building. And I think that that's for a couple of different reasons. One is that prices have gone up and will likely continue to go up. That will in turn cause those insurers to continue raising rates. I don't anticipate a crescendo. Secondly, a person's insurance company might not raise their rates one year, but might the next year. So even if rates do go up for one person, they won't go up for every single person necessarily.

6:14necessarily. So while I don't imagine rates crescendoing, someone might not experience rate increase one year. They might be able to get cheaper insurance, in fact, the next year. But there's not likely to be a market-wide drop in prices that suddenly happens and reverts back to what they were paying years and years ago. The only time we've seen something like that happen recently was during the height of the pandemic when people weren't driving, accidents weren't happening, and prices were much cheaper. So let's drill into some of the specific driving factors that do contribute to higher premiums.

6:50So you and I are probably most familiar at the individual level. A lot of people have an idea about how car insurance works. If you hit something, your prices are probably going to go up the next time you fly for insurance. But what about everybody else? The thing I see all the time on Reddit or any type of forum is, hey, what happened? My rates went up tremendously and I didn't hit anything. I'm a good driver. I've been a good driver for years. A lot of people don't understand that insurance pricing happens on a massive, massive scope. So besides those individual factors, you have stuff like litigation becoming more prolonged.

7:23You have problems from severe weather and the rising costs of paying for climate-related damage. All this stuff, again, just compiles and compiles. It gums up the pipes and makes stuff more expensive in the long run, even for people that are safe drivers. Now, I understand that a lot of states have different regulations that might influence how insurers are setting their rates. Is there anything keeping premium increases in check? I guess the good news is that for the most part, insurers can't just raise rates without approval from a state's insurance governing body. Usually it's like a department of insurance or a department of finance and insurance or something like that.

8:05Besides that, there are maybe a couple of things that states do to sort of make it more inconvenient for insurers to raise rates. I know Washington recently announced a rule where consumers could mail or ask their insurer why exactly they raised their rates. And that doesn't mean they can't still do it, but maybe it's embarrassing. In a way, it wasn't. It really depends at the local level. For the most part, insurance is governed somewhat regularly, but a lot of states have these weird rules that other states don't. How are drivers responding to premium increases? Are they switching policies more often?

8:45Are they dropping coverage levels? Yeah, we've seen drivers for a while become more sort of familiar with the idea of comparing rates. that's just when you look at what insurance might cost you from a few different companies before buying a policy from the insurer you've been working with for 10 years or whatever that is generally what nerd wallet recommends drivers do to help them save rates it's the easiest way to see right away oh this company is offering me a more more affordable rate than this one or this rate is far too expensive right it's easy to see besides that we've found that people are a little more open to lying to their insurer, actually.

9:24So you have sort of unscrupulous and then more like straightforward types of behavior happening. All right. Well, thank you so much for helping us out today, Andrew. Yeah, definitely. Thank you for having me. And thank you, Ana. I will certainly be using some of the information I've learned to help lower my own car insurance. And at least now I know why my insurance is going up.

9:43Sean Pyles:Up next, we're rehabbing a listener's budget. But before we get into that, or remind our listener to send us your money questions. Maybe you're wondering about the best way to shop around so you can save on car insurance, or you want to change jobs but aren't sure how to negotiate the salary increase that you deserve. Leave us a voicemail or text us on the NERD hotline at 901-730-6373. That's 901-730-NERD. Or email us at podcast at nerdballet.com. In a moment, this episode's money question. Stay with us.

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11:37Learn more at Accenture.com slash Spotify. We're back and we're answering your money questions to help you make smarter financial decisions. This episode is a special one. What I'm excited about is the first for our budget rehab series, where we look over your budget with a fine tooth comb and give you our thoughts and tips. Today, we have a listener named Garrett here to talk through his budget with us.

12:03Sean Pyles:Hey Garrett, welcome to Smart Money. Hello. All right, Garrett. So on Smart Money, we like to do a little icebreaker. Sometimes it's finance related, other times not, but today it is. So since our podcast is called the Smart Money Podcast, I'm going to ask you, what do you feel is one smart thing that you have done with your money this year? Finally started contributing to an IRA. My parents have been telling me to do that for a long time. So finally did it. Congratulations. I had one before and then I liquidated it all for college and it wasn't the most responsible. And now I opened a new one.

12:37Sean Pyles:Well, sometimes it takes a not smart move to make smarter moves later on. So good job on that. So now we want to know, Garrett, why you need help with your budget. Why are you here today? There's just some things that I'm not sure what I should do currently and then in the near future, planning and goals. And I'm not quite sure how to meet them and if I should change up the way I allocate money to meet some of my goals. Since you've been using your budget the way that you've been using it, has it helped you achieve any financial goals so far? Yeah, I think so. Like I said, it feels good to finally be contributing to retirement.

13:15Me and my wife bought a home last year, so that feels really cool. I've never had a strict budget, but I've always tracked my spending, and I feel like that kind of helps. Not so much restricting myself to a certain amount each month, but just knowing where my money goes kind of subconsciously helps me be a little wiser with it.

13:32Sean Pyles:You sent us information about your budget, which we'll dig into in a moment, and I'm excited to talk with you about how you're allocating your money. But do you have a current budgeting system that you practice or how do you manage it, if not just in your head? Right now, I just use a Rocket Money app and that's pretty good for tracking stuff. OK. And then I would also like to know how you and your wife manage your finances. So do you pull all your money together? How do you guys approach budgeting? We just have everything together. My wife just doesn't want to deal with it. It's just kind of annoying to her.

14:04So I kind of manage a lot of it and try to do a good job at that. So it's more me, but it's both of our income and everything together.

14:14Sean Pyles:And what would changing your budget allow you to do potentially? What are the financial goals that you're hoping to accomplish? Right now, me and my wife both work. We have a 10-month-old, and we're hoping to have more kids in the future. And my wife wants to stay at home. So that's something we want to work towards is for either working a lot less or not working at all. And if we can make that happen. And also, we just bought a car. My wife was driving a tiny Honda Civic with two doors with our baby. And it was really annoying getting the baby in and out of the two-door car. So we got a big Toyota Highlander, but that was expensive.

14:53So now our emergency fund is like nothing. So I want to rebuild the emergency fund.

14:57Sean Pyles:Well, let's get into your current income and expenses. So how much are you bringing in with your wife? What's your household monthly income? It kind of fluctuates is the thing that's tricky because I am self-employed. So I run like a remodeling business. So sometimes I make$4 ,000. Sometimes I make five or six. I'd say on average, it's around four or five for me. and then my wife's around$2 ,500 to$3 ,000 a month. Okay. That's what we're looking at for income. And so when you sent us your information, you mentioned that you make around$115 ,000 annually, which ends up being around$9 ,700 a month.

15:40Sean Pyles:Does that seem right to you? So that's with both of your incomes. Okay. That sounds a little high. Maybe I did something wrong. I feel like it's not that high. So what would you say you are bringing home on a monthly basis between you and your wife? I'd say$7 ,500. $7 ,500? Okay. Well, for a little peek behind the curtain here, I made a fancy spreadsheet that maps out your income and your expenses. So I'm just going to go in and tweak that real quick because what we like to do at NerdWallet is we use the 50-30-20 budget framework because that allows people to have a balanced way of managing their finances where half of your income is going towards covering your needs, 30 % goes towards wants, and 20 % goes towards savings and additional debt payments.

16:27Sean Pyles:And so depending on where your income falls in these different categories based on the expenses that you shared with us and your income, we can see if maybe you are maybe spending more on wants than you should or if you're not saving enough or if your needs are taking up more than 50 percent. And that can help us make some decisions and talk with you about where you might want to allocate your income to best meet these goals. All right. So looking at the income that you just shared with us,$7 ,500 a month and the expenses that you shared, looking at the spreadsheet that I made, I'm seeing that you're spending a little over half of your income, around 55 % on your needs.

17:02Sean Pyles:And then looking at the savings that you shared with us as well, it looks like about 16 % of your income is going towards savings and debt payments. And then you have around 30, I guess, 28 % left over for once. So actually fairly well balanced on the whole. Does that feel right to you? Yeah, that seems pretty close. I feel like a lot of it goes towards needs. Like it doesn't feel like they're super flexible. But when I think about, oh, maybe we could change stuff. I'm like, I don't know. I feel like a lot of it is kind of non-negotiable. Two things that stood out to me about the numbers that you sent us were that you spend quite a bit on both groceries and health care.

17:40So can you talk to us about both of those items?

17:44Sean Pyles:Maybe Trader Joe's is the problem. They always have these novelty food items that cost more than they should. Did you say healthcare was the other one? Yes. Because I'm self-employed. There's like these Christian health share things. And ours isn't, I don't think it's a Christian organization. It's called Zion Health. So it's like people pool their money together and then spend on medical expenses. So our monthly payment towards that is like$600. But it covers a lot. We have essentially$1 ,000 deductible. So like when we had our baby, it was maybe$8 ,000 for everything, but we only had to pay$1 ,000.

18:24So it's not like bad coverage.

18:25Sean Pyles:I want to talk a little bit more about your car and how much you're spending on that when that hit your budget. What is your monthly car payment? I just paid it off. We bought a car a couple months ago for my wife, like I said. Oh, so you no longer have a car payment? Yeah, no, I just paid it off. So looking at the needs that you sent us, Garrett, we have here a mortgage payment of almost$2 ,000. We have utilities, which on the higher end is around$220, health insurance, life insurance, car insurance, groceries, gas, and furniture. Now, before we get into your needs, because I know you just said it feels like there's nowhere to really cut expenses in terms of your needs bucket.

19:02What is this furniture expense that you have here? I don't know. Just like decor stuff. We really like our house and making it look nice. And I think some of that is furniture and also like buying a new tree for the backyard or grass seed. Just like random stuff to make the yard look nice. So maybe we splurge a bit on that. So Garrett, you're a family of three, correct? You, your wife, and your baby. Yeah. Do you think there's any way to cut this grocery down so you could allocate funds somewhere else? I don't know. I guess probably. Sometimes it's hard to go to multiple stores. It's just a pain in the neck.

19:43So Trader Joe's isn't astronomically expensive for a lot of things, but it is expensive for meat. We get a lot of meat, and maybe it's best to go somewhere else for that. So I guess that's something we could do. But also, I feel like sometimes it's just saving pennies in a way. Maybe saving a dollar to a pound. So is it really worth the extra trip to another grocery store? So I guess the answer is maybe, but I'm not convinced that it's worth it.

20:06Sean Pyles:I think if you're doing it at scale and you're buying meat on a regular basis, this is going to add up over time. So you might want to think about how you can shave that expense, whether it is buying it in bulk or going to even like a wholesale store. I'm also curious, Garrett, since you guys have a little baby, congratulations. I don't see any expenses in what you sent us for the baby. So are you spending much on baby clothes? Does the baby have any other kind of, I don't know, expenses that you haven't included in here? Oh, well, I kind of lumped those into the grocery budget. Yeah, and like clothes, our parents and stuff give us so many clothes.

20:40I feel like we never really spend money on some of those other things or toys. Amazing. Always a perk to have family and friends chip in. So, all right, now that we've looked at needs, Sean, do you see anything else in the needs bucket where Garrett could potentially cut some expenses?