Money Rehab with Nicole Lapin - "We finally have some extra money. How should we spend it?" (Listener Intervention)

Episode Date: October 19, 2021

Today’s Money Rehabbers (AKA the best couple ever) have had some good news in the money department lately. Their bank account is more full than it’s ever been, and they want to make sure they make... smart decisions to make the most of it. Today, Nicole jumps in to help.

Transcript
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Starting point is 00:00:00 Money rehabbers, you get it. When you're trying to have it all, you end up doing a lot of juggling. You have to balance your work, your friends, and everything in between. So when it comes to your finances, the last thing you need is more juggling. That's where Bank of America steps in. With Bank of America, you can manage your banking, borrowing, and even investing all in one place. Their digital tools bring everything together under one roof, giving you a clear view of your finances whenever you need it. Plus, with Bank of America's wealth of expert guidance available at any time, you can feel confident that your
Starting point is 00:00:29 money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.
Starting point is 00:01:10 Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Today's listener intervention is with a couple, perhaps the best couple ever,
Starting point is 00:01:35 that has the question that every financial expert loves to answer. They want to know, I have more money than ever. What should I do with it? And I am super excited to jump in. So Max and Ashley, welcome to Money Rehab. I'm so proud of you guys. It sounds like you're totally leveling up your finances. Can you tell me a little bit more about the last couple of years and what that's been like for you financially? The last couple of years have been actually really interesting because, Gosh, the last couple of years have been actually really interesting because, gosh, if you take it back even two years ago, I was just working as an RN.
Starting point is 00:02:12 He had just got a new job. We had been in our first purchased home in Phoenix, Arizona. The pandemic hit. I wasn't working more than maybe once a month because hospitals were closed and I didn't have a job and I was pregnant and I was finishing grad school. So a lot has changed since then. So where our income was really financially, we were financially dependent upon him for probably a good year, I'd say a year. And once I graduated, got a job, worked for three months, had the baby, took six months off. So really that income is almost negligible. We took the offer to move to Texas in October. We purchased the home and closed in January, moved in. And then we did not actually sell our home in Phoenix until June of 2021.
Starting point is 00:03:01 In that timeframe, I got a new job here in Texas making really good money, more money than I ever have. And he also has done really, really, really phenomenal with his job. He's negotiated at a higher base and then has also done a really good job at earning good money on his commission. The only thing, the only kind of big thing that we've done with the proceeds from the home so far and with the nest day we've developed so far is pay off all of our credit cards. So it's at this point that we're really trying to develop the next steps going forward. Well, first of all, I love the fact that it was a move to one of the nine states with no income tax. Yay. Okay, cool. So you guys paid off all your credit card debt,
Starting point is 00:03:44 and now you have some extra money you don't know what to do with? Yes. Yeah, we have, I mean, more money than we've ever seen in our bank accounts. But we also know that that's just a starting point. Yet. Yet. Yes. So we know it's just a starting point and we just want to, we want to be smart with it. We both come from backgrounds where our family, they don't teach you about money was always real secretive. And, you know, it's I don't have money to do this. And then you grow up thinking, man, I'm super poor. So we're learning all those things as we go and, you know, teaching ourselves as adults. So well, first of all, I'm so proud of you. Because I think even though we don't learn this stuff in school, kids look to their parents for a lot of cues on how to deal with money.
Starting point is 00:04:30 So I think getting your financial lives together is not going to only benefit you, but it's also going to benefit your daughter and your son or daughter who is coming along on the way in March. So you guys should be really proud of yourselves individually as adults, as grown-ass people who are doing this adulting thing. We all don't know how to do it. And as parents. So congratulations, first of all. I just want to say that first.
Starting point is 00:04:57 Yeah, thank you. Well, thank you. Thank you. So you have a mortgage and you have student debt. That's the only kind of debt you have left? And a car. Is it a lease or is it
Starting point is 00:05:05 a car loan? It's a finance. Yes. Yeah. When did you take that out? It was 2020. Okay. We wanted to get a bigger vehicle for the addition. So we did. And we splurged because we got a Tesla. But it was one thing. We're like, you know what? We worked our asses off. We deserve it. So we did. Okay. As long as you frame it that way, it wasn't the best financial decision. But as long as you guys know that and have self-awareness around it, I don't love car notes, car loans, because you're borrowing on a depreciating asset, especially when you're buying a new car. But it's all good.
Starting point is 00:05:40 As long as you recognize that that's what you did. Cool. It's like a small indulgence. It's like, you know, a small indulgence. It's like a latte. It's not necessarily going to, you know, be great for your finances, but we can't take it with us. So it's not my favorite that you have that. But if you're saying, hey, whatever you say, we're still going to have our car loan on
Starting point is 00:06:00 the new Tesla, then fine. Let's put that aside. But you don't want to get out of your car note at all. That's off the table. You just want to leave that aside and you want to think about what to do with the mortgage and the student debt. If that is the smarter move, that is our question to you. Yeah. Because the way we look at it, we talked about it and we can pay off, honestly, we could pay off both of them um and just have the mortgage but that would be eating into 90 of what we have tucked away now um and then we would start over
Starting point is 00:06:33 which i mean we can amass it yeah fairly quickly with what we make and how we currently use our money yeah okay i'm getting out some paper. Hold on to your wallets, boys and girls. Money Rehab will be right back. Now for some more Money Rehab. I think what's really important here is first of all, do you guys have an emergency fund?
Starting point is 00:07:00 Is this part of your emergency fund? This is part of it, correct. Yep. Okay. So out of the lump sum that you guys have right now, let's carve out an emergency fund. Sure. Because when you pay off debt, that is not a liquid investment, right? Correct.
Starting point is 00:07:16 Don't forget that loan repayment is never going to be liquid. Once you've paid off your mortgage or your student loans, it's very difficult to get your money back if you need it for any other reason, God forbid, an emergency, God forbid you lost your job or anything else. So you can't reclaim that cash with student loans. It's really hard after you sell a house, as you guys know, closing costs and all that jazz. You want to make sure you have some actual cash money in the bank six months nine months ideally what is your monthly budget like the bare bones of what you guys need to keep the lights on to eat no mani pedis max no um so if we did that um bare bones would be about $4,000 a month.
Starting point is 00:08:06 Okay. If we were talking like we can eat out every once in a while and what we currently spend, it'd probably be about $5,000 a month. So $4,000 a month times, let's say nine months is $36,000. Yep. What are you guys doing right now for work? So I'm in the medical device industry. So self-rep and she is a nurse practitioner. So relatively stable in high demand jobs. Like if you lost a job, God forbid, then you could get another one quickly and you're in a big area,
Starting point is 00:08:41 lots of hospitals, all the things. Okay. So I feel comfortable with six months. What do you guys feel comfortable with? Well, I will tell you right now, we just looked at it. It's like 140,000. So for us to do nine months, I mean, that way we can talk about like what we currently have. Okay. So excuse me, 138,916 is what we currently have as liquid available in a checking account.
Starting point is 00:09:05 So this is a conversation for you guys to have because there's a lot of financial advice that does not have to do with numbers. It has to do with how you guys sleep at night. So for me personally, you know, with all of my issues, I prefer to have a year in the bank for absolutely no financial reason, but it makes me feel good. And so you guys, I mean, you can have a little conversation now, you can have it later, but it's really what makes you feel safe. I like the six to nine months, honestly. I would rather go nine months. I'm definitely the penny pincher of the family. And it definitely brings me more joy and more security feeling having that cash in the bank. I feel more secure with a nine months. I'm a woman's woman. So 36 grand, if you can put that aside out of your checking account, that might be helpful. Put it in a savings account or you can open up a subsavings or
Starting point is 00:10:14 something like that. What are the interest rates for your mortgage and your student loans? And are they private or federal? So the student loans are federal. We have a mix of the subsidized and unsubsidized. The interest rates on subsidized loans are five, either 5.3 to 5.7. And then the unsubsidized loans, gosh, I believe we're 6.7. unsubsidized loans gosh i believe we're 6.7 okay and that's for both of you guys yes he has a mix i definitely hold the higher balance which is like 74 000 he holds the lower balance that's i think 24 at the moment and then both of ours are federal only mix of subsidized unsubsidized with roughly those interest rates. Are they variable? No, no.
Starting point is 00:11:08 Federal loans are always fixed. For in these cases, insubsidized, unsubsidized. There's other types of loans for federal, but these two in particular are fixed. They were based on prime at the time and then they will not change. And then what is your mortgage? What is the interest rate? 2.85. And why do you want to pay it off early?
Starting point is 00:11:35 Because we don't want to... I mean, it's our dream to just pay off our house. So that way, we don't have to worry about it. What we have is... It's not liquid, but it goes towards our net worth 100% of it. And we, I don't know, we want to retire. I'd like to spend the money that I make rather than paying someone else with the money that I make. Yeah. And that's all you're doing with interest on anything, including your student loans, your car, your mortgage, holding anything with an interest rate
Starting point is 00:11:58 means I'm just paying somebody to hold my money for me. And so if we pay all that off, every single dime I make, I get to spend or put it away for Kinsley or retirement, whatever the case might be. Put aside for the end game. He knows what's up. He knows all the jargon.
Starting point is 00:12:14 But you guys didn't mention investments. That is one of our other questions is we wanted to know your opinion on what type of investments to explore and retirement as one of those investments. Okay. So we have, what is in our retirement? Anything? So yeah, I have a 401k through work that has just over 14,000. She has a... I have an... Okay. So I have an indexed universal life policy that earns interest on the money that I invest in my own retirement, basically.
Starting point is 00:12:51 So I'm paying into it. They invest it and I earn interest on my investment that goes into this then policy. I currently have... It's not... Does your employer match? Max, I guess if you're... Yes i guess if you do yeah and i'm taking full advantage of that so okay cool yeah yeah i i think i maxed it out i've been a 1099 for year and a half i have never held a 401k i think it's pch no i never invested in a 401k and i i
Starting point is 00:13:20 should have because it's free money that you earn. Well, you know, whatever. But I have always wanted to do, my grandpa always stressed a Roth IRA. And I always, I don't know. I've always looked at my, but for somebody as like financially conscious as myself, for me not to have created a retirement plan makes me very nervous. Because I know the later you wait, the more you have to put aside. Like I said, our financial situation didn't really change until I would say 2021 till this year. She started working full time because, um, you know, we were living off of my salary. Um, she wasn't really working a lot. So this is, this is the time. And this is why we
Starting point is 00:14:01 reached out is okay. We have stuff that we can now use to make our future a lot better. So what's the first step? Okay. And what is the car note? Interest rate? The interest rate on that one is like 3.2. What I'm hearing from you is that there is a need for a bigger car for a bigger family. a need for a bigger car for a bigger family. There's not necessarily a need for a Tesla as that bigger car. There's a want for the Tesla, and that's totally fine by me. In general, if I was looking at this, I would suggest that you get rid of this car note and get even a Tesla four years old or older and buy it outright and run the jalopy into the ground. Because based on your idea that you don't want to be paying somebody,
Starting point is 00:14:54 you're ultimately paying a lot for this car because you're paying a huge premium. So cars depreciate most in the first four years, as you know, and then new cars are the are the worst. It could be a pain in the ass to get out of whatever deal it is. I could take a closer look, but generally that would be my advice if I just saw this on paper. But hearing from you guys, it sounds like you've worked really, really hard to get to a place of financial stability. And this was, you know, this was a meaningful purchase beyond just a financial, you know, investment, which is not an investment. So but we know that and that's okay. With your mortgage and your student loans, you know, oftentimes people will say that student loans are good debt because like you invested in your brain. Yes. And
Starting point is 00:15:47 avocados are good fat, but you don't want to eat slowly all day. Right. So I would say because these are federal, though, I'm not seeing a massive urgency to pay this hundred grand of student debt off. We don't know what is going to happen with repayment plans. If you told me that these are private and that they're variable and, you know, they could spike and all sorts of other stuff, I might give you different advice. Sure. But it's really, when you're looking at this stuff, it really has to do with your interest rate. So when you're determining which debt to pay off, there are pros and cons for all different types of
Starting point is 00:16:31 debt. Of course, they're not all created equal, but you really want to match up the interest rate of your debts and compare that to the interest rate that you could gain when interest works in your favor. So typically, if you look at the market, getting you about 7% to 10% over time, investment accounts for retirement, which would be 401ks, Roth IRAs, traditional IRAs, SEPs, SIMPLs, all sorts of stuff, you know, 4% to 7% usually. So you want to match those up and say, hey, where's my opportunity cost here? And am I paying down a lower interest rate? For what reason? You know, am I paying down a lower interest rate just so I could be done with it? Or is that the smartest way for me to go? Your mortgage is a pretty low percentage.
Starting point is 00:17:30 And I would rather you take the $100,000 left. I wouldn't put all of it into an investment account, but I'd buy low-cost S&P 500 index funds, which over time will get you 7% to 10%. And then you're paying off this mortgage, which is eating out 3% from it. But it's not complicated once you line up the interest rates and start the other column. What you guys don't have is the column of interest rates working in your favor. Compound interest is fucking amazing when it works in your favor. It totally sucks, as you guys know, when it works against you. You saw that paying off your credit card debt. For example, if you invest $100 per month from 20 to 40, you earn 8% compounded annually, and you'd invest $24,000. If you did
Starting point is 00:18:21 $100 a month for 20 years, you'd have almost a million dollars when you turn 65. If you waited, though, 10 years and invested from 30 to 50, then with the same amount of cash, you'd have only 200 grand by the time you turn 65, which is $750,000 less. We're talking about big numbers here. I'm not trying to give you a whole economics lesson around compound interest, but it's a lot of money when you are looking at it over time. Do you guys have time? How old are you? 34. 33. Great. Great. You know what? You don't need a lot of money when it comes to investing. You need a lot of time. So I would say you guys have so much time on your side. Really take advantage of the much greater interest you could receive in the market
Starting point is 00:19:14 or through retirement accounts that really trumps. I even hate using that word, but I'll have another one. It makes these other interest rates look small, right? It makes your 3.2% car note or your 2.85% mortgage or even your 5.3% student loans look smaller because you're making more than you're spending. And so my suggestion to you would be for now and make sure you really, really, really want to live in that house. I know you have moved and you have settled here, but you guys are young. And who knows if there is a killer opportunity in another state, you're probably going to leave. I don't know. I'm guessing. And so, you know, I don't know if that's the house you're going to retire in unless you tell me otherwise. So I would I wouldn't
Starting point is 00:20:15 stress as much about paying it down necessarily when you have such a low interest rate. You know, our parents didn't have two percent mortgages, right? They were ridiculous. And so that was a whole different conversation. Their houses only cost like, you know, $150,000 too. Totally. True story. True story. But in our times, if you account for inflation, might be relatively simple, which we always forget about when we talk about this housing discussion. That like our parents bought $150,000 house and now it's worth 500 grand. Yippee, real estate is the best investment in the history of the world. No, like when our parents also went to the movies for $5 and used pay phones for 25 cents, like it was a different world. We're not comparing apples and apples. And so if you're
Starting point is 00:21:05 looking at your house as a place to live, as a place you know for sure that you're going to live in forever, then that's great. It's a place to nest your face off, to have a family, to grow a family. It's not necessarily investment, but you know what? It's a pretty low interest rate, and that's what you call free money. You know, interest rates have never been lower. So locking in a lower interest rate, that's why the market right now for real estate is bananas, because everybody wants a low interest rate. And that's why homes are selling like crazy for ridiculous prices. So, you know, what do you think? I'll
Starting point is 00:21:45 pause for a moment and see what you have to think about that interest rate comparison. So my first thought is in comparing these interest rates, they are all actually fairly similar. Carnot being the highest one. Well, your student loans being the highest. Oh, I'm sorry. Yes. Yes. Those are the highest. However, a car note is stretched over. I mean, we would like to pay it off in three to four. I think our note is over, I think, six. Whereas student loans are a payoff over 10 years. The house, actually, I completely agree with. I initially thought, hey, the more we get get paid off the more equity we have in it which means if we ever did sell that means more cash in pocket but it's more just like an exchange of apples to apples not like now that i see we don't own
Starting point is 00:22:37 five homes this is not an investment this is a home it's one at a time for us. So actually, I do see that. Which, by the way, I talk a lot about the fact that renting doesn't suck. Renting gets a bad name, too. But you have to pay to live. I mean, that's what sometimes is lost in this discussion around housing. There is a cost of living that you don't get back. You pay for food. Are we upset because we go number two and the food goes away and we never get it back? Like there's this expectation that we're supposed
Starting point is 00:23:10 to recoup this idea. No, like if you get back the money you put in, amazing. Right. But this is not a, you know, you're not going into home ownership to make the kind of money that you would make in the stock market. Yeah. Yeah. Well, okay. And then you just brought up the last thought is that if these three, and we'll definitely look at the card, I still don't even have a problem with that, but you're right. That's a lot of debt to hold over our head with a fairly high interest rate. So I think that'll be the one that I really think about. But what it's sounding to me like is... But also don't forget that you're not comparing car ownership versus leasing to home ownership versus renting. Cars depreciate, right? Cars go this way when you want
Starting point is 00:23:59 to recoup it or sell it because you're not going to want to drive the 2020 Tesla in 2050. Right. Right. And the home homeownership is actually an appreciating depends on where you are. Of course, there's a thousand variables, but that's a different animal. Yes. And it sounds like then really, truly, I thought we were going to come into this conversation, be talking about what debt to pay off within those three realms. Actually what I'm hearing is if those interest rates are all fairly similar minus, I'm still thinking about the car. It sounds like with this extra money that we have,
Starting point is 00:24:34 that we want to make money with our money. It sounds like taking that extra hundred grand and putting it into investments in retirement is actually, that's our, that's our, yeah, our brain. Index finding chill. For today's tip, you can take straight to the bank. While paying off a house may feel like the ultimate adulting victory, it's not the right move for everyone's financial situation. If you have other loans with a higher interest rate than your mortgage, pay off the loan with a higher interest rate first. Now that is something to do an adulting victory lap for. Money Rehab is a production of iHeartRadio. I'm your host, Nicole Lappin.
Starting point is 00:25:21 Our producers are Morgan Lavoie and Mike Coscarelli. Executive producers are Nikki Etor and Will Pearson. Our mascots are Penny and Mimsy. Huge thanks to OG Money Rehab team Michelle Lanz for her development work, Catherine Law for her production and writing magic, and Brandon Dickert for his editing, engineering, and sound design. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.

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