Money Rehab with Nicole Lapin - “I Want to Achieve My Financial Goals Within Five Years. What Should I Be Doing Now To Get There?“ (Listener Intervention)

Episode Date: November 18, 2024

You know what you want your financial future to look like… but how do you get there? That’s the question today’s Money Rehabber is struggling with. Today, Nicole helps her build a roadmap you can use to meet your financial goals. On this road, you’ll need a financial bestie. That’s where Bank of America comes in. Find all the tools and expert guidance you need for your financial present and future at http://bofa.com/NewProsMedia

I'm Nicole Lapin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. So I've been doing this whole financial education thing for over a decade, and I have to say the economic landscape has never been harder to navigate. And so Bank of America and I are teaming up to help you, money rehabbers, answer the big financial questions that are on your mind right now. Like, how do I talk to my friends about money? Should I combine finances with my spouse? How do I make my money work harder for me? You know, all the

biggies. So Bank of America and I are doing six episodes together where I talk with real money rehabbers about their financial dreams and navigating this economy. You're about to hear the first episode and it tackles the topic of how to live the life you want now while also building toward the financial future you want for yourself. When you're setting out on a path to financial freedom, you're inevitably going to hit a fork in the road that divides you from what you want right now and what you think you should provide for yourself in the future. That's what today's money rehabber called me to talk about. She feels like she's at that fork in the road and she needs help deciding which way to turn. The good news is

she doesn't have to choose. With a thoughtful intentional spending plan, which is what I call a budget, by the way, because it sounds more fun, you can set your future self up for financial success and enjoy the present, which is exactly what I wanna talk to her about today. So here's how it went down. Max, welcome to Money Rehab. What's your question? I'm feeling pretty good about where I am right now

in terms of how much I'm making. I feel like I'm able to live the life that I want right now as much as someone in my early early thirties, but I wouldn't be able to just like fast forward 10 years and live how I want to live when I'm 40. If that makes sense. Like I want to buy a house someday, but I couldn't now. So I want help figuring out what I should be doing to set myself up to be able to meet my financial goals that will later come.

Well I love this question. But before we can talk about how to get the financial future you want, we need to talk about what you want for your financial future. So can you describe what your dream life looks like? Well I work in marketing and I'd like to have my own firm someday. I love that. Okay cool. So let's get a little more granular. You mentioned that you want to buy a house. Do you want to buy a house where you are now? Or do you want to move to another city? Do you want to have kids? Do you want to retire early? Do you want to work till you're nine, too? I mean, tell me all the things, Max. Right there. I live in New York City and I

don't really see myself buying an apartment here. It's just like way too expensive for what you can get. I think I would move outside of the city, but stay close. I'm not exactly sure where that'll be. And yeah, I do want to get married. I do want to have kids. I have two sisters and we're really close, so I've always kind of pictured having three kids. I don't feel the need to live in a super rich and crazy luxurious life when I rolled her, but the need to live in a super rich and crazy luxurious life when I ruled her, but I do, I know I don't want to worry about money. I want to feel like I can always get what I need. I think that building up my firm is going to take time. So I'd rather have that be really successful than retire early.

And when you picture buying this house, how old are you in this picture? Is it 20 years from now? Is it 10 years from now? Five years from now? I'm 31 and I'd like to buy a house before I'm 40. So I guess I'll say I'm shooting to buy in five or six years, I guess. Awesome. All right. Well, unfortunately, dreams have price tags. Do you have a sense of how big you want this home to be? I'm just trying to get a sense of what our budget is here. Well, let's say I do have three kids. I'd like everyone to have their own bedroom. So I guess a four bedroom. They wouldn't necessarily all have to have their own

bedrooms from birth. Growing up, my family lived in a four bedroom house and I shared a room with my older sister until I was maybe eight-ish. And then the spare room was used as a gas room. I'm not really looking at real estate just yet, but I do know everything is expensive. But because I'm flexible on the location, I'm not tied to living in a super expensive area. But realistically, I don't know. Do you think 730 K is reasonable? Yeah. I mean, as you're talking, I was doing some searching around and I'm seeing four bedroom homes for 700k in Staten Island, Jersey City, I'm seeing a really cute home for 600k. I mean, who knows what's going to happen in five years real estate does tend to appreciate, but I think 750k is a reasonable budget.

Okay, this is great news. We now know what we want. And when we want it, we just need to figure out a plan to get there. So in order to make a realistic plan, let's talk about your financial picture right now. How much money are you making? I make just over $100,000. That's amazing.

I know you said that you eventually want to start your own firm. Are you happy with where you are right now? Happy enough. I don't want to start my own firm because I don't like where I am now. It's more that I want to build a business that's mine and be able to run it in the way I want to. Yeah, sister. You don't have to tell me. I totally get it. So you're not planning on leaving this job, the 100K job anytime soon? No, I'd like to stay for here for a while. And you mentioned you're renting right now. How much are you spending on rent? I pay around $3,300 a month. And besides housing, what are some of your big expenses?

I guess just utilities like electric, internet, and my phone bill. So how much would you say you spend on all that a month? Oh, I should probably know that. Maybe $300. Cool. And do you have a car? It doesn't sound like it. No, I don't. I take public transportation to get to work, so that's like five bucks a day. Nothing crazy. Do you have any debt?

I have about $20,000 left on my student loans. That is one expensive, beautiful brain you have there, Max. Yeah, seriously. And I got in-state tuition too, so it wasn't even as crazy as it could have been. And how much are you paying off your debt a month? It's about 380 bucks a month. So when we think about those big expenses, plus other things that come up, of course,

going out to dinner, ordering in, meeting friends for drinks, whatever it is, what do you think your average monthly burn rate is? What do you mean by burn rate? Like how much do you spend a month on average? Including rent? Yeah, let's include rent. Probably like 5K a month. Okay, cool.

So after taxes, what's your monthly take home pay usually? It's around $6,000 a month. Okay, so the math here is easy. It sounds like you have about a thousand bucks a month left to play with. What are you doing with that thousand bucks right now? Are you saving it? Are you investing it?

I'm putting it in a savings account. How much do you have in there right now? I have around 10k in there. Just like a regular savings account or a high yield savings account? Just a regular savings account. Oh, well, I have some notes on that, but okay. Do you have a separate retirement plan? Yeah, I have a retirement plan through work. I think I have around 60K in there. I've been

at the same company since I graduated. That's great. So I'll tell you how I think about budgeting for the future and my future goals, and then you can tailor what I do to fit your needs and goals and wishes and desires and all that good stuff. So I created a spending plan for myself and I divvied up into what I call the three E's. Essentials, End Game, and Extras. Essentials are all the things we talked about. Housing, transportation, groceries, all the need to haves. The extras are the nice to haves.

These are all the things that you like but you don't necessarily need. So eating out, ordering in, ball or vacations, whatever does it for you. The end game is the thing we can often forget about. That's your retirement and your long-term future goals, like having those three kids, buying that four bedroom house, building a firm, retiring on the beach somewhere, when you're ready, of course.

Okay. So when I was your age, 100,000 years ago, just kidding, but when I was your age, I put 70% of what I made toward my essentials, 15% toward my endgame, and 15% toward my extras. But in this economic climate, I see more of a case for the 50-30-20 rule, which you may have seen. And following this rule would basically mean 50% of your income toward essentials, 30% of your income toward extras, 20% of your income toward your endgame. So between the 3,300 bucks for rent,

around 300 bucks for utilities, $380 for your student loans, your essentials are at 39.80. And that doesn't include groceries, so let's call it more like 47.80. But you said your burn rate is 5,000 a month. So let's say the Delta, or the difference between the 5,000 that you normally spend

and the 4,780 that you normally spend and the 4780 that you spend on essentials is what you're spending on extras. So it sounds like you're spending about 220 bucks on extras. Okay. So crunching the numbers, you're spending about 79% of your total take home pay on essentials, which is a bit higher than the 50%. We lay it out in the 50 30 20 rule. If you shoot to bring down what you're spending on essentials, you can allocate more towards your future goals while also treating your present self. Of course, your biggest expense right now is rent.

That is typically the case. Usually experts say your housing costs should be no more than 30% of your take-home pay. Right now you're spending more than 50% of your take-home pay on rent, which is not unusual in an expensive city like LA or New York. But I think what you need is to start taking into account

your future self. If you wanna buy a $750,000 home in five-ish years, you're gonna need to put 150K down for a down payment if you wanna put 20% down. And right now you have about $10,000 saved. If you amortize what you need to stash away for a down payment, you're gonna need to put $28,000 per year If you amortize what you need to stash away for a down payment, you're going to

need to put $28,000 per year aside for that lump sum. Now you don't need to put 20% down, and if you're a first-time homebuyer, you can probably get a first-time homebuyer loan and put a lot less down. But that just means that the principal on the loan, the chunk that's accruing the interest, is going to be bigger. So just something for you to keep in mind. So let's rip off the bandaid here. You're saving a thousand dollars a month or 12 grand a year. If I were you, I would be asking myself, how can I essentially double the amount that I'm saving?

Now, this isn't exactly what you need to do. And I'll talk about that in a second, but let's just imagine a scenario where you're really leveling up your savings. The obvious place to reallocate your budget is to find some savings with your rent. I know it's a pain in the neck to move, but do you think you can find a cheaper place? I mean, I live in Williamsburg and I love my apartment, but it is in the most expensive part of Brooklyn.

I've lived in the same apartment for two years, but it's just an annual lease. I'm not locked in for a long time period, so I guess I could look into a cheaper place. I don't know. I'm in my 30s. I don't want to be living in the same kind of shoebox I was living in in my 20s, where if I was lying down on my bed, I could touch all floor walls. So fair. So maybe for you, your housing falls into your essentials and your extras category, because maybe it's not essential for your apartment to be as awesome as it sounds like it is, but it also is the place that you wanna treat yourself,

which I totally get and totally understand. The thing is though, something has to give, right? The good news is that you have a lot of options here. If you don't wanna spend less on your essentials, you could work on making more money. You could also ask for a raise at work or take on a side hustle. If you're assuming your income is gonna stay the same,

you can always extend your timeline so that you have more time to save up for that down payment or you can look for a less expensive house. So the down payment isn't that hefty. You have a lot of levers to pull here. You could also think about not putting 20% down. Like I said, again, that has implications for how much you pay over the lifetime of your loan, but you have options.

That makes sense. But I do want to be super clear here, Max. You can meet your financial goals without depriving yourself in the present. When I make my spending plan, and yes, I made it in my 20s and then have updated it constantly since life and everything else has happened and our budget is always changing. So when I make my spending plan, I personally made sure that I think about my future self and budget for my end game and my current self. And that's where the essentials, but also the extras comes in. It is really important to do the things that make you happy now and balance the things that make you happy later on.

So it is doable to have both. You just have to be intentional about it. So let's talk about saving for your down payment. Do you have any investments right now? No, I don't, other than my 401k. OK, so here's the cool thing about getting deeper into the financial world. That $150,000 that you need for a down payment is hefty and probably sounds like a really intimidating number.

But you don't necessarily need to earn $150,000 to the penny to have $150,000 because you can build toward that down payment with investments too. Are you open to investing? I am. I guess while I'm still paying off my student loans, it feels a little risky to invest just in case I lose the money. I totally get it. There are different flavors of investing. There are principal protected offerings like treasury bonds and certificates of deposit, AKA CDs. There are also higher risk options with a potentially higher chance of reward like investing in the stock market. Historically, the stock market has returned 8% year over year. And you're right, investing does come with some risk of loss.

So what I do personally is diversify my investments. I invest in the stock market, which again is a higher risk, higher reward option. And I also invest in safer investment offerings like CDs and treasury bonds. Treasury bonds are backed by the US government, so they're one of the safest investments out there. CDs are also super safe. Bank of America, for example, has three CD options that are all insured up to $250,000,

so you could essentially put your whole $150,000 for your down payment in a CD and the entire nest egg would be insured. The CD yield actually depends on where you live. So you're going to want to check out your specific rates. But for where I live in LA, Bank of America has three different CD options. The featured CD that's available offers up to a 4.35% yield at the time we're talking. So if you can invest some of what you're saving and you earn a yield, that can help you finance your house for more than just your income alone. So in order to build toward this goal, you're going to need a budget.

Do you have anything like that right now? No. Do you think you could? Yeah, for sure. So what I would do for your next steps, Max, is to take the price tag that we put on that $750,000 home and build out a budget that gets you there. So reverse engineer it. Once you take a look at those numbers, you might decide that it's more worth it for you to push back the timeline, or maybe you won't. Maybe this financial goal is more important to you.

But the most important part is that you do the math and know where you're at and if you're on track for where you want to be. Do you have any questions about this game plan? I feel good, actually. There's a part of me that finds it a little scary to put numbers to a goal, but it's also motivating. And having a plan that will help me get there is amazing. Well, I am super proud of you, Max.

And no doubt, future Max is proud of you too. For today's tip, you can take straight to the bank. If you're also looking to make money moves for your current and future self, you'll find tools and guidance you need at Bank of America. To get started, just go to bofa.com slash new pros media. I linked it in the show notes, but if you have your heart set on typing this one out, again, it is bofa.com slash new pros media.

This episode was brought to you by Bank of America. Money Rehab is a production of Money News Network. I'm your host, Nicole Lapin. Money Rehab's executive producer is Morgan Lavoie. Our researcher is Emily Holmes. Do you need some Money Rehab? And let's be honest, we all do. So email us your money questions,

moneyrehabatmoneynewsnetwork.com to potentially have your questions answered on the show or even have a one-on-one intervention with me and follow us on Instagram at Money News and TikTok at Money News Network for exclusive video content. And lastly, thank you. No, seriously, thank you. Thank you for listening and for investing in yourself, which is the most important investment you can make.