The Rachel Cruze Show - How to Make Your Money Work for You

Episode Date: September 4, 2023

Becoming a millionaire doesn’t happen overnight, but with discipline and smart choices, it’s totally possible to reach your money goals. Today, I’ll walk you through how you can start investing (even if you’re a beginner), show you the money magic trick that actually works, and debunk the popular 50/30/20 rule.   What you get in this episode:  ·      Investing for Total Beginners ·      The Money Magic Trick That Will Make You Rich ·      Why I Wouldn’t Recommend the 50/30/20 Rule   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

Interest is a major pain when you owe money. But don't forget, it can be a positive thing when you have money. Compound interest is a magical thing when it comes to your money. It is the magic trick that's going to help you become wealthy. Hey guys, welcome to this episode of the Rachel Cruz Show podcast. I'm so glad that you're here. So this is going to be a really great episode because in this episode, we're going to talk about how to make your money work for you.

I'll go over my thoughts on the 50s. 20, 30 budgeting method. Then we're going to talk about the power of compound interest and how that can help you build wealth. But first, let's talk about investing one-on-one. Take a listen. So I recently posted something on Instagram about investing and it kind of blew up. There were so many comments, so many shares when it came to this topic.

So I thought, hmm, this is interesting. Let's bring it on the show and talk about the subject of investing. And since my investment strategy has been the same for all. I was again kind of surprised by just all the comments and the questions. And as much as I believe that everyone should be investing, I also believe that no one should invest in something that they don't understand. And no one should invest before they're financially ready as well. So today I want to cover just the basics of investing. So whether investing is something that you've never done before or you're a veteran at it and you're just now curious about my philosophies compared to yours than this episode is for you.

So since this is investing for beginners, let's start from the very beginning. What is investing? Well, investing is taking a portion of your income and putting it into a fund that's proven to help it grow and increase overtime. So you want to do this instead of just storing your money in a savings account in the bank where it doesn't have the opportunity to grow from compound interest, which we'll talk about in a little bit. So investing really is a long-term play, and it's one of the most powerful tools for wealth

building. So as soon as you are in a stable place financially to start contributing some money towards investing, you need to be doing it. And listen, it's never too early or too late to start. So if you're in your 20s and you're new to being financially independent and maybe you're, making a smaller salary, but you're in a position where you can contribute something, then yes, something is better than nothing. And wealth building is more about behavior than math. And consistency over time, you guys, is so powerful when it comes to investing. So let's make sure that you know when it's the right time to get started. So here's the deal. I want you completely out of debt, except for your house, if you own a home, all consumer debt is gone,

and you have a fully funded emergency fund of three to six months of expenses. So this is really important because I want, again, your debt gone. I want you debt free. And then I want you to have some money liquid in the bank to get to because it wouldn't help if you have like $20,000 in a 401k and you need to replace your tires, but you have no cash available, right? That's not. helpful. So having some cash in the bank is really key before you dive into investing. Okay, let's go over a few basic terms and kind of concepts so that you feel confident about investing. So first, let's talk about what it means to buy stock in a company. So when you buy stocks, you're actually becoming part owner of a company. A very small piece of ownership

now is to you when you buy a stock in a company, which is amazing. So you're buying a very small share or portion of that company. So, they can use that money that you're investing to grow their business and profit more over time. And when this happens, you can earn money two different ways through dividends and stock value increases. So dividends are kind of like profit sharing for all the company's shareholders. And this is where a company takes its profit and gives everyone a slice of the pie. Not all stocks or companies do this, but some do. And in this case, those dividends would go back into the stocks that you're in investing in. So the stock value increases, on the other hand, are when you buy stock and you wait

for the value of the company stocks to increase. So you buy stock at one price and over time the company is successful and you own that stock at a higher value. Then you can sell it and make a profit or you can keep owning that stock in hopes that again, the value keeps increasing over time. Now, you might be wondering how your money grows when you're investing. So this is one of my favorite parts of the investment conversation because it involves compound interest. So let's let's say that you buy a $100 worth of Apple stock. If you make 10% on that stock in the first year, then the thing you bought for $100 now has value of $110.

Then let's say the value increases by 20% in the next year. Now you're making 20% profit, not on the $100 that you had originally invested, but on the $110 that is in there, which now is up to $132. Then let's say it jumps another 30% in value the next year. year. Now your stocks are worth $171. Again, remember, you put it in $100. Now it's at $171. That means you made $71 in profit, almost doubling the value of your original purchase just by putting your money in the right

place. Okay, and just to play a little devil's advocate, let's say that next year the stock actually drops in value, because remember, the market does this. And sometimes it happens, but it's usually not a huge loss because when you average it out over the lengths of time that you're investing, your stock has still grown well past your initial investment. So, for example, if your Apple stock were to decrease in value by 15%, you'd still end up with stock worth over $145. And again, over time, you'll continue making money on the profit that you passively have earned because you just put that money in

and you stop doing anything else and you just watch it grow. So basically it's free money that keeps increasing over time. And this is why it is always best to start early, because time is on your side. So don't wait until you can contribute $500 a month, 10 years down the road. No, you can start contributing $30, $40, $50 today. And trust me, you'll be impressed

by how much progress that you've already made by the time you're in that better financial place because you started early. Okay, now let's talk about a few other terms that you should be familiar with, the S&P 500, Dahl Jones, and the NASDAQ. So all of these are indexes, which give you a summary of how the market is doing.

So just think of them like measuring sticks to help you see if the market is growing or if it's declining. So the S&P 500, for example, is a list that shows how the 500 largest publicly traded companies are performing. So think about Apple, Johnson & Johnson, Google, right? 400 are the biggest companies that are publicly traded. And this is considered to be the best gauge to see how the market is doing. Then you have the Dow Jones Industrial Average, aka the Dow Jones or the Dow, and it monitors 30 big companies. Then you have the NASDAQ, which follows mostly successful tech companies.

So in the news, you'll hear about all three indexes, and you can get a snapshot of how different parts of the market are doing. Now, a lot of you are curious about the difference between index funds and mutual funds. So index funds are a type of investment designed to mirror the performance of the stock market. So for example, if you invest in an S&P 500 index fund, then you're using your money to buy a little piece of all those 500 companies that were included in the index. And one pro of this method is that it diversifies

and balances your investment. So you're not putting all of your eggs in one basket. You're putting them in a lot of different, reliable baskets. So rain or shine, you can expect the same return on your investment that the S&P 500 produces. One disadvantage of index funds, is investing is that it's passive, meaning that you don't have a professional managing your account, so your investments are kind of just on autopilot. Now, historically, they tend to follow the

market, but they never beat the market. So you have lower risk and lower reward. So if you want to maximize your profit, you want to invest in mutual funds, which is why that they are such a great place to invest in retirement specifically. So a mutual fund is 90 to 200 stocks, 200 companies, which again is great because you're buying from a lot of different companies. Remember, diversifying, spreading your money around is key. And when you invest in mutual funds, you'll work with a pro who monitors the progress of your investments. And you want to invest 15% of your gross income before taxes in retirement. Now, there are two types of retirement accounts that you want to buy mutual funds in, and that's a 401k and a Roth IRA. So one of the

differences between the two is when taxes are taken out. So money in your 401, 401k, that's your company's retirement plan, you're going to actually put money in that before your taxed on your income. So that means when you pull money out of your 401k, it's going to be taxed on the growth. Where a Roth IRA, that word Roth is really key. That means you put money in a Roth IRA after you've paid taxes. So you've paid taxes of the government, your money hit your checking account and you say, okay, I'm going to take that money and invest. That means over time the growth in that Roth IRA, you are not taxed when you pull the money out because you've already paid taxes on the money that went in.

Now, that word Roth, again, is really important. And some companies even offer a Roth 401K. Whenever you see Roth, go for it. Because, again, you are going to take money that's already been taxed out of your paycheck, but the growth is going to grow tax-free, which is amazing. So, again, what's important here is that your 401K majority of companies will offer a match,

which you definitely want to do. So remember this. Match beats Roth, beats traditional. Okay? So you want to do your... your company's 401k match first. So let's say to that they offer a 5% match. You want to contribute 5% and match up to what the company matches you.

And then you're going to go over to your Roth IRA and put the remaining 10% in. Now, there are limits when it comes to the Roth of how much you can actually contribute. So if you haven't hit that and you still have money in your 15%, then you can go back to your 401k and invest the rest. So again, it's a little complicated, kind of nuance, but these are two vehicles. goals, which are really important when it comes to retirement investing specifically. And we talked about mutual funds earlier. So those are actually the things you're going to be investing in over the heading of a 401k and a Roth IRA. So again, this is kind of just the basics, kind of gets in the weeds, but it's really important to remember the stuff, you guys,

because when you start investing, I want you to understand where you're putting your money and what you're putting your money in. And I also recommend connecting with the smart vester pro because these are investment professionals who follow Ramsey principals and they're vetted and coached by our team here at Ramsey. So they really do follow the baby steps. They make sure you're doing your 15%. Because we want you guys to win long term when it comes to your money.

So go to Ramsey Solutions.com to start working with a professional as soon as possible. And you can find more information about index funds, mutual funds, and the baby steps on Ramsey Solutions.com to start making some progress. And let me tell you, your future self will thank you.

So have you ever stopped to think about how much missed opportunity is wrapped up in having debts? Well, I think we can all agree that interest is a major pain when you owe money. But don't forget, it can be a positive thing when you have money. So compound interest is the ultimate magic trick for your money. So first off, what exactly is interest? Well, simply put, interest is the cost of borrowing money.

When you take out a loan, you have to pay an extra percentage of that total during the time that it takes you to pay off your debt. So buying a home is a common example of this. Most people who make an average income choose to buy a home before they have the entire cost of the house saved in cash. This is the only type of debt that I approve of because property is known for being an appreciated assets, meaning the value of your home will likely increase over time. Car loans, student loans, credit card debt, none of these things are considered investments because they aren't earning you money long term.

In fact, you're probably losing money. because of, yeah, you guessed it, interest. This is why, other than a mortgage, it is never wise to go into debt for any reason. So, for example, let's say that someone purchases a designer bag that costs thousands of dollars on their credit card. Well, they could easily end up paying way more than that bag was ever worth because they have to keep paying more and more money in interest

as they work to pay off the total original debt. And the same thing goes for cars and student loans as well. Now, keep in mind, you're still having to pay interest over time on a mortgage loan, but the good news is that you can buy or refinance at a time when interest rates are low, allowing you to lock in at a good rate and eventually have more margin to pay off that debt even faster. Also, no matter how interest factors in, homeowners still end up making a profit on their house because the value of it increases over time. All right, compound interest is the interest that you earn,

so aka the good kind of interest. It exists because the bank rewards us when we let them borrow our money. So if you have $100 in the bank and it earns 5% interest each year at the end of the year, you will have $105 just for having that $100 saved to begin with. Now, the next year that will earn the same 5% on the new total of $105. So then you'll end up with $110.25 and so on and so forth. So how does that? this affect investing? Well, instead of keeping all of your savings in the bank, you can actually

invest the majority of that money in other accounts like mutual funds or index funds, and it allows it to grow over time because of compound interest. And I'm talking about more than just $100 for my one example. But we have an amazing investment calculator on ramsysolutions.com, so you could plug in a few hypothetical numbers. So let's give a few examples here. First, let's just take the average monthly car payment for a new car is about 570. So if you were to invest that amount every single month from age 25 to 65, you'd contribute a total of $275,000 over those 40 years. And because of compound interest, it would add up to more than $3.6 million, you guys. $3.6 million.

Is that not crazy? Now, sometimes other priorities have to be addressed before you're ready to invest. So I want you out of debt and having a fully funded emergency fund of three to six months of expenses. then you can dive into investing. Let's take that same amount and calculate what my total would be if I were to start investing a little bit later. Let's say you were to invest $575 every month between ages 35 and 65, but with a 10% annual return,

your total will come out to $1.2 million. And that's just because, again, within 10 years, you guys, that's what's crazy. Within 10 years, that's a loss of $2 million. So the earlier you can start investing, even if it's a small amount, the better off you're going to be. All right, let's keep calculating. So the average student loan total per borrower is just under $39,000. An interest over the life of a 20-year loan comes out to $27,000, just an interest.

So that means you're paying a total of $66,000 or almost double of what you originally signed up for. So with this in mind, the average student loan payment comes out to $300,000. $193 a month. And I've heard a lot of people justifying student loans by saying that they'll go away after 20 years, but we've just seen firsthand that the government can change its mind on student loan policies whenever they want. So I never recommend relying on the government to take care of you and your debts. But for argument's sake, let's just play that game. Okay? So let's put $393 into an investment calculator for a 20-year time frame with a conservative 10% annual return estimate you'd be earning just shy of $300,000 by investing that money instead. So some of you might be feeling pretty good at this point because you're thinking, well, I don't have a car payment or a student loan. So now what? Well, let's try one more example using the most widespread debt in the United States, credit card debt. So as a fall of 2022, the average credit card debt balance per borrower was $5,910. And since 78% of Americans say they feel like their living paycheck to paycheck because many are just paying the minimum monthly payments

on credit card. Usually credit card companies charge a minimum payment of 2 to 4% of your total balance. So this may not seem like a lot, but if you're just scraping by month after month, year after year, this is a recipe for a scam because chances are you're stuck in that cycle, you'll end up paying way more than the original cost of the thing that you bought using credit. Plus, with that 20% interest rate that they're going to charge you, most store credit cards again, in other cards, it's unbelievable, you guys, the interest right here. But again, 20% now is like the average.

Then you're looking at a grand total of almost $8,000. So way more than the original price of the item that you purchased. So if we take 3% of that $8,000 of the minimum monthly payments, you're looking at $240 per month. And if you invested that between ages 25 and 65, you'd contribute a total of $15,000, which means you'd have more than $1.5 million due to compound interest. Have I proven my point yet, you guys? Oh my gosh, it's so difficult because, again, you're giving the bank so much of your money when you could be keeping it and actually making money for yourself, but instead, or making the banks rich.

So no matter the amount, no matter the timeline, compound interest is a magical thing when it comes to your money. It is the magic trick that's going to help you become wealthy. and all you have to do is get to a place where you're investing wisely, consistently, and making it a habit. So if you're interested in learning more about investing for beginners, make sure to check out my video from earlier this week. Because I break down all the confusing key terms and walk you through the ends and outs of investing. So there is a popular budgeting strategy called the 50, 20, 30 method. And recently it's been attracting some criticism. And as you can probably guess, I'm not a huge fan of this method.

I think there are other ways of budgeting that are much more effective when it comes to building wealth. And I'll talk about those later on. So basically, the 50, 20, 30 theory teaches you that 50% of your budget goes to your needs. That's food, housing, transportation, utilities, insurance, daycare, all that. 20% of your income goes to saving and paying off debts. And then 30% of your income goes towards what you want, which is restaurants, entertainment, shopping, travel. Now, I appreciate that there's some intention. effort to create a plan for your money. But I also think that there is some issues with

this way of handling money. So today I want to talk through some of the blind spots and teach you a better way to control your finances. First of all, a lot of people say that they love the 50, 20, 30 budget because it's simple. And yeah, I agree, it is simple, but that's one of my issues with it. If your budget is super simple, broad structure like this, then it means it's pretty stagnant. So you're telling me that whether you're breaking home $40,000 or six figures, you should always get to spend 50% of your income on the same bare bones needs. And if someone is drowning in thousands of dollars of debt and his neighbor has a paid off house and a car, they should not be doing the exact same thing with their money. It just doesn't work that way, you guys. So depending on where you are

on your financial journey, you're going to have different priorities, which is exactly why the baby steps work. So speaking of priorities, another issue that I have with this method is that there's no goal setting. So if you're really wanting to win with money, you should constantly be working towards some kind of goal. And as it's cheesy as it sounds, having a goal-oriented mindset is what builds powerful momentum. And this is another thing that the baby steps teach you how to do. So having a list of goals in the order of most to least important will show you exactly where to put your focus so that you can consistently work towards future success, like saving for retirement or building an emergency fund.

When you use your budget to take those steps one at a time, instead of struggling to do it all at once, all the time, you make progress. All right, another reason I don't like the 50, 20, 30 is that it doesn't account for generosity. So I'm a big proponent of giving, you guys. It is a powerful thing that you need to do with your money. And when you commit to making small sacrifices in order to bless other people, those blessings come back to you. And I see it all the time.

There's something about the joy that is created inside of you when you are giving. So whether it's the traditional 10% tie, or maybe you set aside a certain amount of money for a local charity every month, choosing to spend some portion of your income unselfishly will change the way you think and handle money. And this brings me to another flaw about the 50, 20, 30 system. it focuses way too heavy on your wants. So I don't want to be the grumpy old party pooper here, but sometimes it's just not necessary or helpful

to spend your money on non-essential purchases. Now, don't get me wrong, there is a time and a place for this, okay? I want you to have fun with your money. But when you're up against thousands of dollars of student loan debt or credit card debt or you're struggling to afford a home, it's best to channel all your extra funds towards those important money goals.

So you might have season, where you're actively choosing to only spend 5% on fund purchases, and that's okay. Sacrifice is necessary sometimes in order to get what you really want. That's the beauty of having a budget and a long-term goal is that they work together. Plus, when you're working towards a specific money goal, there's hope and knowing that your current budget won't be forever.

If you're advancing through the steps to financial freedom, there will come a day where it's going to make more sense for you to spend more on luxury. But if you spend an entire part of your life, an entire part of your budget towards just your wants, you'll have zero cushion for other stages of your life, like retirement or an unexpected emergency. So the key is to evaluate what's best for you and your money right now, where you currently are. Then as you goal set and adjust your budget over time, you'll get to a place where there's a lot

more freedom. And again, that will come a lot faster when you're very specific about what you're trying to do with your income. Now if you're thinking, okay, Rachel, that's all great, but what is the right way to budget? Well, let's talk about that because I think this is a really key part of winning financially. So I teach a zero-based budget, and this is where your income minus all of your expenses equals zero, including giving and saving. So it's going to be very specific of where you are on the Ramsey Baby Step. So if you are paying off debt, that means you're going to look at your budget and you're going to cut categories that are not necessary

because you're going to throw that extra money to get out of debt or to build up your emergency fund. And once you're debt-free and you have money in the bank for an emergency fund, then you can put some of those categories back in. So you see your budget flows with where you are. That's why I love a zero-based budget. It's very specific to where you are in life. And last, but not least, my number one tip for successful budgeting

is to find tools that work for you, which is why I always recommend the every-dollar app. It's the app that my family and I use every single month, and it's truly the best resource when it comes to budgeting. All right, you guys, budgeting. It's a huge part of winning financially. So don't just take a standard approach. Do the zero-based budget, again, where you are financially is what's important. You have a say over your money. All right, you guys, thank you so much for listening to this episode. If you have loved this episode and learned a lot, make sure to share it with a friend and spread the news. and also if you will leave a review on this podcast, it helps us out so much.

We want to get this show in front of as many people as possible so they can learn how to take control of their money. Because as you guys know, that's one of the most important parts of all of this is take control of your money and create a life you love.