The Rachel Cruze Show - How to Invest (and Rest) Like a Rich Person

Episode Date: January 23, 2023

Let’s talk about how to build wealth (and still go on vacation!) in 2023. I’ll share with you guys how the rich invest, explain everything you need to know about the Fed, and show you how you can afford to go on vacation this year. Here's what we’ll cover:  -       How the Rich Invest Their Wealth -       What Is the Fed? (And Why You Should Care) -       How to Afford Vacation in 2023 Helpful Resources: Christian Healthcare Ministries EveryDollar                                                 Sponsors pay the producer of this show, The Lampo Group, LLC, advertising fees for mentioning their services or products during programming. Advertising fees are not based upon or otherwise tied to any product sale or business transacted between any consumer or sponsor. The following sponsors have paid for the programming you are viewing: Christian Healthcare Ministries.   Learn more about your ad choices. https://www.megaphone.fm/adchoices Ramsey Solutions Privacy Policy Learn more about your ad choices. Visit megaphone.fm/adchoices

don't go into debt for your vacation. Okay, it's not worth it. It is not worth it. Because when you get hungry, you're paying on that vacation for months and months and months and it follows you home. So save up, pay cash.

Hey guys, welcome to the Rachel Cruz Show podcast. I am so glad that you're here. So in this episode, we're going to talk about how you can invest and rest like a wealthy person. I'll walk through how to rest and actually go on a great vacation in 2023 without,

breaking the bank. But first, let's talk about how the rich invest their wealth. We can all learn something from this. So take a listen. So this episode, we're going to dive in and talk about how the rich invest and grow their wealth. So I know investing can sometimes be like, oh my gosh, it's like very confusing. You feel like people are either like really lucky in it and they make a bunch of money or they're really smart and they know all these secrets. But listen, the truth is, a lot of investing principles used by people who actually are rich and wealthy and build wealth while doing it are pretty simple. There's not a lot of secrets. There's not a lot of things that you're like, oh my gosh, I just don't understand that. It really is. It's pretty simple, which is encouraging.

That means you can understand it and you can do it as well. And you guys, I can't stress enough how important this topic is when it comes to growing your wealth. So let's get right in. Okay, to start, let's take a minute to recap when you should invest. I want you to know there is a time and a place for you to be investing, specifically with retirement. So we always talk about the baby steps on this show, but it's really important that your financial picture is in order. So I want you to have no debts, okay, completely debt-free,

except for a mortgage, if you have a mortgage, that doesn't count, but completely debt-free when it comes to consumer debt, have a fully funded emergency fund of three to six months of expenses. is saved in the bank. Then you can move on to investing, which is, we recommend 15% of your income into retirement. So if you're in debt or you don't have cash for an emergency fund, press pause on investing, get all that straightened out. So you have a really solid foundation, then press play so that you can start investing. Okay. So now that we've established that, let's talk about the first investing principle that the rich understand. They have a long-term perspective.

Yes, investing, it is a marathon. It is not a sprint. So when the stock market goes crazy and has all these ups and downs, it can be insane and you can get emotional and be like, oh my gosh, I'm just take my money out. But you leave it. Because, again, it is a long-term perspective. You're looking out at retirement ages, right?

In your late 50s and 60s, that's where you're going. So you want to have that big picture because, again, it's easy to freak out and have this short-term perspective and want to pull your money out. And I like to think of it this way, too. We say that the stock market is like a roller coaster. And the only person who gets hurt on a roller coaster is the person that jumps off. So stay on the ride and let it go.

It's going to be scary times. It's going to be exciting times. But just keep your money in because you're looking for a long-term perspective. So let's look at a real-life example here. Do you remember 2008, 2009, that recession? Do you remember that? Well, let's say that you put money in before all of that in 2007. and we'll use Kate, our BFF Kate, as just an example.

And Kate has been doing great. She's working hard, she's putting money away in retirement, and she's been doing this for a long time. So let's pretend that Kate has $400,000 in her 401K. It's pretty awesome. In 2007, Kate is doing great. Well, 2008 comes, the crash happens, and the stock market hits rock bottom March of 2009.

Okay, so it goes all the way and down. And for most people, more than half of what they had, the value of what they had, was cut in half. So between October of 2007 and March of 2009. So it was terrible, okay? So Kate's 401K balance dwindled to a $169,320. Y'all, $169,000 when she had $400,000. If that doesn't make you want to throw up, I don't know what will.

Like, terrible, not good, okay? And everyone's feeling that in the world then, if you remember, panic, people are freaking and out, they're pulling money out of their retirement, you know, the 401ks and the Roth IRAs because they want to have more stable investments. And again, everything's gone crazy. So here's what's wild. Slowly but surely, it did not happen overnight, but by March of 2013, exactly four years after it hit bottom, the stock market fully recovered and it continued to rise. So fast forward today, even though since then, you know, it still has done this. And we've all felt that recently. I know. But Kate, she kept your money in, had a long-term perspective.

And today, she now sits well over $1 million in her retirement account. Yep. So her money is tripled that she had pre-recession and she didn't even invest another penny. Okay, so that's what's wild is if you just take those numbers and just let it ride up, she has over a million dollars. So wealthy people invest regardless of what the market's doing. Because, when you're not investing consistently, yeah, you may miss out on some of the lows, but you're also going to miss out on some of the highs. All right, the next principle that the wealthy understand is you have to take advantage of tax-advantaged accounts. So these tax-deferred accounts are things like a traditional

401K or 403B, even a traditional IRA. So all of these things are great, because before taxes are taken out of your paycheck, you invest, the money grows. And then when you take it, get out of retirement, you pay taxes. Now, there's a beautiful thing called a Roth. What you think of a Roth is just like a little nice, you know, barefoot dreams blanket over your account, and it's wonderful and great. And so that Roth actually protects you from taxes even on the growth. But when you fund your Roth, you fund it after you've paid taxes. So it's your money that comes home, and then you take that money and invest it. But then that grows tax-free. So anytime you see Roth, that's your BFF. That's your co-euf. That's your co-eastern.

blanket that you have in life that covers you against taxes, which is great. But regardless of that, 401Ks, 403Bs, IRAs, IRAs, these are all really great retirement vehicles to put your money in and let them ride out to retirement. I'm telling you, the 65-year-old version of you, the 63-year-old version of you, the 59-year-old version of you, it's going to love that you've been doing this because you put your money in and you keep it. So again, baby step four, once you have all your debt paid off in that fully funded emergency fund, be investing 15% of your income into retirements. We did a study here at Remsey Solutions that we interviewed millionaires. It was the largest millionaire study ever done.

And it's crazy because majority of them say that the 401K was one of their top ways to build wealth, not inheriting, you know, a fortune or day trading. But the 401K, it was the thing that kept coming up that helped them build wealth. So it's a good thing to do. Okay, I'm next. You have to be consistent. Consistency is key, and it's over time, you guys. There's no shortcuts.

It's not get rich quick. It is putting your money in, day in and day out, you know, every year, even though every month, even though the market may be going crazy, you continue to invest. And here's the deal. People that kind of freak out, when the market's down and they're like, I don't want to invest. The people that are investing are actually going to be. able to buy more shares, more stock of a company because they're cheaper because the value's low. So, you know, your $1,000 of stock when everything's going great is going to buy you, you know,

this much. But when it's down, it's going to buy you this much. And then that much gets to rise back up, gets to go up when the market returns. And it's a beautiful thing. So regardless of what the market is doing, be consistent and continue to invest. If you need to pause investing for things like rebuilding your emergency fund if you use that or if you want to save for a down payment on a home, maybe you'll pause for that. You know, there are reasons to pause investing once you're on maybe step four, but not a lot. So I would say otherwise consistency is key. All right, another principle that the rich understand is that they must focus on growth. Okay, so what does that mean? Well, when you're saving for retirement, there's an enemy that you're trying to outrun,

and that enemy is a word that we've heard a lot recently. Inflation. Yep. That means the dollar today is going to feel more like 75 cents a decade from now. So you want to make sure that your investments are outpacing inflation. And when you look at the S&P 500, on average since like 1929, 1928, it has average 11.8%. Okay, so you can look at that and look at average inflation, and it does. It outpaces it. Some investments that people use, you know, whether it's like CDs or other things, long term may not, outpace inflation. So you do want to make sure that your growth in your investments is outpacing inflation, but your 401k, Roth areas, all of that within the market, should be doing that.

All right, the last principle that we're going to talk about is that the wealthy reduce risk with diversification. So diversification just means to spread around, okay? Don't put all your eggs in one basket. Spread everything around. Because there's an element of risk when you invest like in one stock and everything is just right there. That's a really scary place to be because it's happened before that company tanks and you lose all your retirement. And some people love to day trade and all that. That's even risky.

So, I mean, again, all these things, it's up to you if you want to do it. But I'm telling you the best way to do it is to spread your money around. Mutual funds is a great way to do that. That's 90 to 200 stock that are going to be in a fund that you use. And you can use those. those mutual funds within your 401k and Roth IRAs and all of that. So even within the mutual funds, though, there's different types of mutual funds. So we recommend four different types to put a fourth and growth in income, a fourth in just growth,

a fourth, an aggressive growth, and a fourth in international. So even within your mutual funds, you're just kind of spreading it around, which is great because sometimes things go up, other ones go down, and it just ends up balancing out over a long period of time. Now, if you're just starting out, you may feel like, oh my gosh, this is insane. Hopefully it wasn't. Hopefully, you kind of got a grasp of, okay, this is, these are smart principles to use when I invest, but I always recommend sitting down with an investment professional, okay?

And I would recommend reaching out to one of our smart investor pros because they understand the Ramsey journey that we're taking you on and they have a heart of a teacher, and they can sit down and help you with your investment. So I recommend doing it, you guys. This is a big part of growing wealth. in the long term. And I get it. I mean, there's sometimes for me where I'm like, oh, I see how much, you know, I put it into my 401k or, you know, doing our Roths. And I'm like, oh, that money, that would have been a great vacation. If we had spent that money, just one year, that would have been really nice.

Like, there's sometimes you're like, I just want to enjoy my money. But it's consistency. I'm like, I do it regardless of what's going on, putting the money in because it's going to grow and that's the thing that's going to help you build wealth. So today we're going to talk about something that can be kind of of confusing and kind of mysterious, the Federal Reserve. Yep, otherwise known as the Fed. Gosh, you've heard the word the Fed, the Fed. I feel like so much recently because it's connected to topics like inflation and recession, all of that. So, man, it has been said and it's so funny because everyone's like, the Fed and people have ideas of what it is or they have no idea what it is. So it's like this mysterious thing. And we're going to talk about it all and what it has

to do with you and what it has to do with our economy. So we're going to break it down. First and foremost, what is the Fed? So the Federal Reserve is the U.S. Central Bank. So after a series of financial panics that really shook up the economy in the 1800s, the Fed was founded by an act of Congress in 1913 to make sure that the American baking system was more stable. Their role was basically to oversee the economy, regulate banks, and control the amount of money that goes in and of our system. So the Fed sets the federal funds rate, which is the rate that banks charge each other for short-term loans. The federal funds rate then influences the interest rates on other loans, like mortgages, credit cards, student loans, all of that. So why would the Fed make changes in rates?

Well, typically the Fed raises interest rates when inflation is high, so it really can, like, hurt the stock market, company earnings, people freak out and they pull their money in. And that's one thing. But then the lower rates, if the economy is sluggish and they need a boost because the lower rates for people to borrow money, make it easier to spend and get the economy going. But the catch is lower rates

could lead to higher inflation, aka people holding onto cash instead of spending it. So the Fed likes to keep inflation about the 2% mark right around there. But when inflation goes up, then they raise the federal interest rate, to control it and slow it down, because, again, people will buy less stuff out there spending money when interest rates are high because they're not going to borrow as much money.

And that's why the Fed has steadily been raising interest rates lately. You'll see it. They're like, so what does that mean for your money? Well, hear me say that rising Fed interest rates impact your money. So whether it's your saving, it's your spending, it's paying off debt, it's your budget, you're going to feel the rising interest rates. So if you have credit cards, for instance, and the rates are rising, that means that you're going to have higher interest rates,

which means you're going to be paying more money over a long period of time. And that's one reason I always tell people, just cut up your credit cards. Just get rid of them. Be done with it. It also means that if you have a fixed rate mortgage, then you're pretty safe. So if the interest rates rise, you're in a fixed rate. So you are where you were when you got your mortgage.

mortgage at a fixed rate. But if you have an adjustable rate or a he lock, then again, you have a risk of your mortgage rates going up as the Federal Reserve interest rates raise their rates. And then when it comes to your investments, people tend to invest less or even cash out their investments when interest rates rise. And this can cause the stock market to dip, which is a great chance for long-term investors actually to invest when prices are low. So if you're on baby step four and investing 15% of your income, don't stop investing when the market is down. Don't pull your money out.

Just ride it out. And last, but not least, if you have a savings account, the rising interest rates are actually a good thing because you're going to see a bump of your savings with your rate of return. You're going to get more money in that way. And again, this is for traditional savings accounts,

money market accounts, and CDs. So if you have money in savings, it's actually a good thing. You're going to be making more money on your money, which is awesome. So what is the Fed up to right now? Well, the latest update is that December 14th, 2022, they raised its benchmark interest rates to the highest level since 2007. And this was actually a smaller hike than the other ones we've seen over the past year. But officials said that they

expect to keep rates higher in the coming year with no reductions until 2024. So we'll see what happens. And some investors are worried that it will be impossible for the Fed to get inflation under control without triggering a recession and stock prices continue to go down. All of it. And what's crazy is the market did go down as you watched on the Wednesday after the Fed's announcement about raising interest rates. So it's all connected and it's just, it's crazy, it's wild, but it does. It affects you and I and our money when it comes to investing and saving. So what should you and I do about rising interest rates? Well, remember, the Fed, we can't control them, right? They're not going to change. They're going to continue to do what

they've been doing. But what can change is you. Yes. This is back to one of those things when we talk about control what you can control. And so even though they're trying to, like, fix this problem with math and raising interest rates so people don't borrow money, don't spend money to get supply and demand under control right now, I mean, it's just, it's a mess. It's crazy. But what can you control? You can't control the Fed. I can't control the Fed,

but we can control where our money is today and what we're going to do about it tomorrow. So if you have debt, get out of debt, student loans, credit cards, all of it. Get out of debt by paying off your smallest debt first and then going up to the next smallest and the next. So that's called the debt snowball method. That's what I always teach people the best way to get out of debt.

So don't sit there and try to fool with like, oh, well, I'll move this card balance here and all this and trying to move and as the interest rates rise with the Fed, when they raise rates, it's like, oh my gosh, it's insane. Just get out of debt. That's very helpful. And then when you have your emergency funds, you actually end up taking advantage of what's going on because you're going to see a slight boost because interest rates are rising,

so you're going to be making more money off your savings. Now, again, you're not making crazy money in a CD or money market or, you know, a traditional savings account. But every bit helps, right? We're not going to be mad at it. So that's a great thing. Also, you want to budget to make sure that you're in control of your spending and that you know what's going on. And not to panic.

I mean, so much emotion can go in. Again, when the Fed raises their rates, that affects trickles down other things, you know, you watch the news, you see people's Facebook posts. Friends are talking and it's just like fear, scary. Oh, my gosh. But remember, control what you can control. So being out of debt is key. Having an emergency fund in place is key. having margin in your budget where you can do that,

whether it's cutting things or adding income, is key. If you do have investments, even though things have gone down because people are freaking out, stay in the market, don't freak out and pull your money out, continue to be there,

and we got to ride this thing out. So so much of this, you guys, is a long-term perspective, and that's what you have to have with your money. You make really bad financial decisions when you're looking like a week out, a month out. And we don't have a crystal ball.

We don't know really what's going to happen in the future, but I believe we've been through this before. Like, you can look back on recessions and high inflation, all of it. It's not fun. We're in the middle of it, so I'm not saying it's great. But I just believe in the American economy enough to believe that we're going to come out of this. I really do. And so you're going to continue to see things normalized and stabilize, but it's going to take some time.

So be patience. So today, we're going to talk about one of my favorite things in life. A vacation. Yes. And how to afford one here in 2023. So I know the year is just getting started. but listen, you're probably already thinking about the vacations you want to take this year. And that's a good thing because the truth is, the more you plan, the more your vacation

becomes a reality. So that's what's exciting. I want you to stick around to make sure that this reality happens because I wanted it to happen for you no matter where you are in your financial journey. So we'll talk about that. But to start, here's a little formula that can help you get going. So first, you want to figure out how much money you need to carve out of your budget on a monthly basis in order to save for your vacation.

then you're going to multiply that number by the number of months between now and your vacation. And then you've got your vacation budget for 2023. So here's kind of what that looks like in action. So if you're on baby steps four through seven, which means you are out of debt and you have a fully funded emergency fund, then you can say, okay, we want to take a great vacation. Well, the average household salary in America is around $71,000. So we're going to just use that as an example. And let's take a family of four that wants to go to Myrtle Beach in July.

Well, that's going to cost them around $4,500. That means they need to start saving $750 a month from January to July to have the money saved for their trip. Now, if they traveled in October, then they'd only have to save $450 a month, which is great. Or they could simplify even more and just save $300 a month and go on a $3,000 vacation, you know, in October. So it's awesome to like just look at the math and kind of figure out, okay, what do I need to do? But you may need to have some of that money, though, that you say that you're going to have to spend during it. Because if you want to buy plane tickets, if you need to put a deposit down on a house or a hotel, you know, something like that happens,

you may need some of that cash along the way, which is great because you're going to be saving along the way. But keep track of everything just to know, okay, this was our end goal. This is how much we want to spend on this vacation. And then you'll be able to have it all right there. when you actually go on vacation. Now, if you're on Baby Steps 1 through 3, which means you're saving up for that starter emergency fund of $1,000 or you're trying to get out of consumer debt or you're saving up your fully funded emergency funds,

then you're going to think outside the box for your 20-23 vacation because here's the deal. Getting out of debt and saving up an emergency funds is way more important than a vacation right now. It is. That's just the truth of it. And it's for short-term sacrifice, but I want all of your money going to those two goals because once you knock that out, you're going to have a solid financial foundation,

your stress will be lowered, you're going to be able to actually start doing stuff wisely with your money and your lifestyle. But until then, staycation time, right? Go camping. Go to a nearby beach or a lake. You can go to a theme park for a day or something. Like there are things that you can do that are really inexpensive and around your area, but I don't want you going and spending a ton of money on vacation.

if you still have debt and you're still building up your emergency fund. So another thing that you can do, though, is just Google destinations that are, you know, three hours away from your house or less, and you can do just a day trip somewhere. You know, I just think about even when Winston I first got married, most of the vacations we took work with our families because both of our families would go on vacation every year. So we were like, I'm going to just bum off the families. Thanks mom and dad. Thanks, in-laws.

You know, and then we kind of were like, okay, we'll go away for like a weekend or maybe just like one night for anniversary, right? Like, things can start small, but you can still get away until you start building up some money. And again, you're in a place in the baby steps where you're able to spend more, which is fantastic and so fun. Now, for some of you, you already are saving for your vacation. You know what's ahead and you're good to go.

Well, great job. Two thumbs up for you. Here are some tips, though, that may help you cut some costs. So I would weigh your options between driving and flying. maybe you know what's cheaper, what's easier. It's always that time thing, right? If you fly, depending on the destination, it's going to be faster than if you drive and take a long road trip. But it's much more expensive.

But if you have the money for it, and that's awesome. That's what you want to do, then fly. You could even sign up for airfare alerts on different websites for the destinations that you're interested in to get the best deal because they'll alert you when the prices drop. You also can search for flights on a weekday and take advantage of the off-peak prices. which is great. And if you're driving, then I would download the gas buddy app, and this is great because along your route, it can show you who has the cheaper gas prices. So that's easy. And also, if you find a hotel that has a free breakfast or kids eat free or something along

there, that's going to save you so much money. This happened one time when we took the girls a few years ago to a hotel. Yeah, and they were like, kids five and under get free breakfast and lunch or something. We were like, oh, it's like money back in your pocket. It's so great. So exciting. Okay. Last, think about not just hotels, but Airbnbs, VRBOs, or Homeaway.com. There are these websites that I know you guys know about, but honestly, they usually are cheaper than a hotel. And you get more space, more room, especially if you have a family. You know, you can even think about camping or glamping or renting an RV. Anything that's cost-effective, just think outside the box, and you can save some money.

So remember that a vacation, it's not going to be relaxing and funny if you're stressed about money the entire time. So I want you to set a budget, make peace with that, and know this is the amount of money we have. And don't go into debt for your vacation. Do not go into debt, okay? It's not worth it. It is not worth it.

Because when you get home, we're repaying on that vacation for months and months and months and it follows you home. And you spend differently, your mindset's different when you're used. using debt versus your own money. So save up, pay cash. All right, share this with a friend who you'd love to plan a trip with, you know, and you're like, hey, let's go travel. Let's do this. Well, it's going to be so fun. So happy 2023 and vacation time. It's so exciting. And regardless of where you are on the baby steps, I want you to enjoy life. We always say to take control of your money and create a life you love on this show. And creating a life you love does mean, you know,

getting away every now and then. But I want you to be smart about it. it because I want you to enjoy it. Oh, vacations. They're my favorite. Love it, love it, love it. Well, thank you guys so much for listening to this episode. And if you have not subscribed to the podcast, make sure to hit that follow button. And if the spirit leads, you can leave a review. And as always, make sure to take control of your money and create a life you love.