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In 2018, Malyia McNaughton had just started selling some handmade items on Etsy and at pop-up shops, but she still worked a bunch of other odd jobs, including modeling, bar tending and other random gigs, to pay the bills.
She had $500 in her savings. With the goal of increasing that number to $5,000, McNaughton joined The Financial Gym to learn how to become more financially stable.
McNaughton never dreamed that in two years she'd have $30,000 in the bank, Issa Rae would wear her Made by Malyia jewelry in episodes of "Insecure" and actress Amanda Seales would sport her earrings during the 2020 BET Awards.
But in that short time McNaughton has managed to save $18,000 in an Ally Online Savings Account and an additional $12,000 in a retirement fund. And she has Instagram posts filled with celeb supporters.
McNaughton has also paid off one of her three credit cards, and she hopes to pay off the last two soon. Like many small business owners, she temporarily had to halt production this spring due to the pandemic. In order to protect her finances, she's dramatically lowered her living expenses by staying with a parent, and she's been collecting unemployment benefits.
So far, McNaughton has been able to avoid dipping into her emergency fund. She's paying the minimum on her remaining two credit cards and looks forward to getting back to her final payoff goal soon.
"The pandemic kind of shifted gears on paying off debt, so that was an adjustment for me," McNaughton tells CNBC Select. "That was a little disappointing ... but once we get to the other side of this I will pay [my credit cards] off."
McNaughton says a "hidden skill" of managing your finances is learning to recognize when you're stuck in a limited mindset. Fed up with the "struggling artist" stereotype, McNaughton realized that she had become too comfortable with debt, simply because she couldn't envision a way out of it.
She needed some proof that there was another way. In speaking with a trainer at The Financial Gym, McNaughton realized that her initial savings goal of $5,000 was far too small. She would actually need closer to $20,000 to feel confident in her ability to navigate the ups and downs of running a business, so she increased her savings goal to $18,000.
Many financial experts recommend people prioritize paying off credit card debt before they focus on building an emergency fund. But McNaughton found she felt more secure having cash in the bank.
Before she had the security of a savings account, McNaughton says she was often charging both business and personal expenses on a credit card. But now, if she needs to cover an emergency expense, she knows she can. And when business picks back up, she plans to spend her money in part to cover marketing and production costs so she can generate revenue without digging herself deeper into credit card debt.
When creating a financial plan, McNaughton and her Financial Gym trainer first figured out how much money she needed for her basic expenses. Then they divided any leftover money into two categories, one for debt and one for savings.
"Initially I had a very aggressive debt repayment plan, which was about 70% debt repayment and then 30% savings," she says. It was working for her, but she never felt truly comfortable. "Everyone operates differently."
McNaughton realized that she felt limited putting 70% of her discretionary money toward her debt. She wanted the ability to use revenue from her growing business to help build her brand's visibility and increase her company's output.
"I wanted to be able to invest in my business," she says. "As an entrepreneur, your income fluctuates. And when I needed capital, I wanted to have cash flow that I could potentially tap into."
So McNaughton shifted gears. For the past two years, she's been allocating 70% of her discretionary income toward savings and 30% toward paying off her debt. This allowed her to pay down her credit card balances at a rate she felt comfortable with, covering a little bit more than the minimum payments every month. She made a goal to pay off one credit card every six months while building up a cash safety net and also saving for retirement.
"It helped me balance things a little bit more," McNaughton says.
In January 2020, McNaughton hit her savings goal.
"I was like, 'Oh, my gosh, I've never had this much money in one place at a time,'" she remembers. Almost instantly, she felt excited to start paying off debt as aggressively as she saved.
"Some people would rather get credit card balances to $0 and then start saving," says McNaughton. "I don't think that would be best for me, because now that I have a nest egg ... I feel more accomplished."
As a self-described "visual person," seeing five zeros in her bank account gives McNaughton a tangible sense of possibility and reminds her that goals are always in reach.
"Now $30,000 doesn't feel like a lot like when I look at the numbers. I'm like, 'Now I can do $100,000 next year,' and before I would have never been able to say that."
Information about the Ally Online Savings Account has been collected independently by CNBC and has not been reviewed or provided by the issuer prior to publication.
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