The Rachel Cruze Show - How to Reach Your Money Goals (and Still Have a Life)

Episode Date: August 14, 2023

Here’s a little-known secret: Winning with money is only 20% math—the other 80% is all about your choices. And the best time to start making smart money choices is right now! Today, I’ll show you how to get started, share some helpful tools, and walk you through a few options to consider in order to reach your goals and create a life you love.   What you get in this episode: ·      How to Save Your First $100,000 ·      Can You Afford a Bigger Home? ·      Is the FIRE Movement Too Good to Be True?    Helpful Resources:  ·     Start budgeting for free with EveryDollar. ·      Find a Ramsey Trusted Real Estate Agent near you. ·      See your earning potential with our Investment Calculator. ·     Learn more about Christian Healthcare Ministries today! 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

We're going to talk about the fire movement. Fire stands for financial independence, retire early. So we're going to unpack it. And I'm going to react to a video of a couple who plans to retire at 35 years old. Hey guys, welcome to this episode of the Rachel Cruise Show podcast. I'm so glad that you're here. So in this episode, we're going to talk about how to reach your money goals, but still have a life. Sometimes it feels like you can't do both, but you definitely can.

I'll go over at the fire. movement is actually too good to be true. Then I'll go over how much house you can afford based on different incomes. But first, let's talk about how you can save your first $100,000. And it's possible, you guys. So let's talk about how you can do it. Take a listen. I've had people ask me this before and they're like, okay, so how do you save $100,000? So with that, let's walk through how to save that amount of money and what you should do with that money once you've saved it. So first of all, the best way to have success with saving is what I call the seven baby steps. So the baby steps are a proven system that have helped hundreds of thousands

of people take control of their money by budgeting, paying off debt and saving money wisely. Plus, it's the strategy that I use to save my first $100,000. So the first step of saving $100,000, no matter what your finances look like right now, is to make sure you're doing a monthly budget, and have a starter emergency funds. So that's because your budget is a plan for your money. And if you want to get $100,000, then your budget is the roadmap to get there. And personally, I use every dollar.

It's a budgeting app that I highly recommend. It's completely free. It's really easy to use, fully customizable to you and your specific needs. So you guys, if you've never done a budget before or tracked your spending or any of this, it's going to take about three months to get your budget to work. Okay?

So the first month, it's going to be terrible. second month, it's going to be a little bit better. And by the third month, it should start working. So third times a charm, okay? Three months of budgeting for you to feel consistent, and that's a good thing. Okay, so keep at it. So just start somewhere and adjust along the way as you need to. And make sure to give yourself grace again because understanding where your money's going

and controlling your spending can be tough. But once you have the tools and you're following a monthly budget, you're really going to start to be able to see, okay, I can get some traction because I know where my money's going. And then you'll be able to start to budget to save for your starter emergency fund of $1,000. So that $1,000 should be enough to cover minor emergencies that come up while you focus on paying off debt. So paying off debt is Baby Step 2. And it's going to be almost impossible to build wealth and to save six figures if debt payments are constantly draining you financially. So that's why Baby Step 2 is to pay off all of your debt,

for your mortgage. Now, I know it can feel kind of daunting and overwhelming to think about paying off your debt, but you have to get any and all debt out of the way so that you can free up your income so that you can build real wealth long term. So if you're going to attack your debt with intensity, you're going to do some drastic things. You're going to be selling stuff, you guys. Look in your house. If you have furniture, clothes, shoes, whatever it is, sell it, get some extra money. And then even at nights or on weekends, get a side hustle, drive for Uber, all your streaming services for six months, do whatever you can to put as much money towards paying off your debt. So again, throwing any extra dollar is going to help you. And you're going

to be doing a tactic called the debt snowball. So this is a method that I love when it comes to paying off debt because it's not about attacking the highest interest rate first. It's about attacking the smallest amount of debt you have first. So you want to list out all of your debts, smallest to largest, and you're going to pay off the smallest one first. So cutting those streaming services, getting that extra job, selling some stuff, all of that extra money you have is going to go to pay off your smallest debt first. And once that's paid off, you roll it over to the second smallest debt, and you keep going. And studies have shown that this method is the quickest way to pay off debt. So, once all of your debt is paid off, then you really are going to have the momentum to build up

some good savings. So that is the next step. Baby step three is to have a fully funded emergency fund of three to six months of expenses. So let's just take an example. So let's say the median income in America for a single adult around 35 to 45 years old is about $62,000 a year. So if that's you, then after taxes, you're bringing home about $4,000 a month. So if you are spending that full $1,000 a month, all of your expenses are that, then you want to multiply that by six and you want to save $24,000 and your fully funded emergency fund. So again, you're going to look at your bills.

And for some people, it's like, yeah, what are the things that I have to have covered, you know, rent, utilities, transportation, all of that. And you're going to say, okay, how much of this costs me per month? And you're going to take that and you're going to multiply it either by three, four, five, or six. So you're going to have a three-month emergency fund to six months. So again, that's kind of the range that we say for Baby Step 3, three to six months

of expenses. So you can kind of figure it out on your own what's best for you. If you have an income, you're on commission and so your income is inconsistent, I would lean towards the six months just to have some extra cushion, or if you have, you know, a ton of kids and a lot of expenses going out, probably six months is more you. The three month, I would say if you have a consistent income, you know exactly what's coming in. You don't have a lot of people dependent upon you if something were to happen.

You could probably be more that three months. So again, you can pick it, but that's going to be your fully funded emergency fund. So once you're out of debt, you're going to move to that savings plan, and that's really going to help you. And that's one thing that I love about the baby steps is that after you complete one step, you get momentum for the next step. So once your emergency fund is fully funded, three to six months of expenses,

I would put that amount of money in a high-yield savings account or a money market account. Now, if you're curious about those types of accounts, I'll link the episode that I did earlier this month where I walked through the pros and the cons of both of those options. So make sure to check that out.

So at this point, we're about a fourth of a way through saving up your first $100,000. All right, steps four, five, and six. are kind of a package deal. You're going to do all of these together. So at this point, again, you're budgeting, you have your emergency fund, put away, you have no debt, all things are good. Life is good. And so this is where a lot of people, again, go on to say, okay, this is where I can really feel like I build wealth. Because Baby's Step 4 is you're going to be investing 15% of your income into retirements. And the power of compound interest when you're investing is an incredible thing.

Now, the market, of course, goes up and down depending on the season that we're in. But it's an incredible thing when you start to watch your money work for you. And it starts to grow throughout the day or while you're sleeping. It's an amazing thing. So again, when you're putting money into retirement, that's going to be going towards that $100,000 that you're saving towards. And then you're going to really look at your net worth at that point and say, okay, what I own minus what I owe is this.

And again, if you don't have any debt except for your mortgage, then you're going to be really close and probably over that $100,000. So you'll be investing into retirement at that point, and then you're going to save for kids college, and then you're going to be putting extra towards your house so you can pay it off. And once that is done, then that is going to bring us to baby step seven. And that is where you build wealth and you're able to give so much of it away and be generous. So when you get here, again, this is incredible because your retirement is growing, your investments are growing. Your home is paid off and it's increasing in value every single day. And so your net worth is

really going to start to explode at that point, which is what's really fun. And it should be, again, well over $100,000 at that point. So really what I want you to see is the key here, when people kind of throw around the $100,000, I want to save my first $100,000. Yeah, that sounds really fun and exciting. But you want it in a plan that's going to work for you. So it's not always this like number specifically we're going after. it's more of a state of your entire well-being when it comes to your money. Because again, at the end of this, to be able to have budgeting as a habit for you, having no debt, having an emergency fund you can get to when you need it, having retirement,

a paid-for house, that's the whole goal, you guys, and that's what's really exciting because it is possible for you. It's not going to happen overnight. You have to be intentional, but man, it is possible. So if you stick to the seven baby steps, that is what's going to be so, so key. So to help you start saving today, make sure to check out every. So you can't save money unless you know where it's going. So getting a budget is so, so key.

I'll put a link in the description for the app, so make sure to check it out. So I know a common dilemma that a lot of homeowners face is wanting to move and upgrade their home, but not knowing whether it's possible financially. So today we're going to figure out how much home you can afford. But there are a few things that you need to have some clarity on before we get too far in the process. So number one is define when the right time will be. for you to buy a home. So whether you haven't bought your first home yet or your current homeowner

looking to make your next move, there are a lot of factors in the mix. So there's the housing market, inflation, interest rates. I mean, all this stuff and all these aspects affect the home buying process. But listen, the truth is we have very little control over those things, but we do have control over ourselves and our money. So once you've taken control of your budget, you've saved up for a down payment, you've gotten your income where it needs to be for the monthly mortgage payments, then for you, house hunting should begin. It's not always based on what's going on in the market. Sometimes it's based mostly on whether you are ready for buying a house or not. Number two, based on that timeline, what should your price range be when you're ready to

start looking? Well, this is the piece of the puzzle that I want to focus on today. Because remember all the factors we talked about a few minutes ago, well, all of those, you may not be able to control them, but you should be aware of them so you can make the best decision for your money. So let's calculate exactly how much house you can afford and talk through a game plan to see if you can actually afford to upgrade. The first step towards figuring out if you can afford a bigger home is to calculate 25% of your take home pay. So when you're budgeting for monthly housing costs, I recommend the 25% rule

because no one wants to have their dream house but then not be able to afford. groceries or not being able to do stuff with your money and your income because if it's all going straight to your mortgage payment, then you're not going to have the margin to invest for the future for retirement, save up for kids college, all these other things. So let's take an example of $75,000 a year and that being your salary because that was the median household income in America as of 2023. So obviously this is going to vary based on where you live, your cost of living, what you do for work, all the things. So we're talking about housing, again, things are going to be different in Des Moines versus

San Francisco, okay? So we know that. But according to the data, it's the most realistic number for people right now, which is why we're going to use that for this example. So with an income of $75,000, after taxes, you're bringing home about $5,000 a month. And based on the 25% rule, this means your monthly house payment should be no more than $1,250 a month. And that's going to include, again, the principal, property taxes, and HOA fees. All right, the second step towards figuring out if you can afford a bigger home is to plug in your 25% number into a mortgage calculator and determine your house hunting budgets. So this means you're going to be combining the number that you just calculated with other factors like interest rates,

insurance estimates and property taxes so that you know that you're working with an accurate total. And this also will determine how much down payments you need to be saving for. So if you say, okay, I can afford a $1,250 monthly payments, a home that costs $163,000, with 20% down, a 5% interest rate, $182 in property taxes, and $71 in insurance would fall within the $1,250 budgets. So I know that's a lot of numbers, but that's exactly what you want to do to figure out your exact number.

And you can't just take the price of your dream home and divide it by 30 years and then again, by 12 months. It's a little bit more complicated than that. So I would encourage you to plug in all of your numbers into a mortgage calculator because it does all that tricky math for you. So I'll link the mortgage calculator that I use so that you can start crunching your numbers right away. and it's a really simple tool that helps a lot.

All right, the third step in figuring out if you can afford a bigger home is to add up all the additional fees like closing costs, inspections, appraisals, and changing and home insurance rates. So let's say you're purchasing a $400,000 home, which was the median price for a single family home May of 2023. Multiply that number by 4%. And you'll get an estimated closing cost of $16,000. So then add that amount to a 20% down payment, $80,200.

And ideally, the total cash needed to purchase your home would be just over $96,000. So again, that might sound really high. But what I would encourage you to do is kind of play around with the numbers because 20% down, you guys, is what we recommend, but it's really high. And so if you're a first-time home buyer, it's okay to put 5, 10% down. But you just have to realize that you're going to be paying in addition. insurance, PMI, private mortgage insurance, because your lender wants their loan protected in case you can't pay. So again, there's some extra costs that go in, but you can go as low as 5%

for a down payment or as high and as great as 20% or even beyond that. But that 20% mark, you can avoid PMI, which is really key. All right, you guys, so I know we compared $75,000 income and what that could be to afford a home. And then we just compared the median price of a home was $400,000. And those feel like two very different things. And so that's why for a lot of people, they're dual income earners, if there's a family,

there's two incomes coming in, which will help with that. But it is kind of a depressing market. When you look at the numbers, you're like, oh my gosh. So that means if you're looking for a home, you guys, you're probably going to have to drive an extra 20 minutes outside,

maybe where you want to be. Your location is going to be a huge factor of the price of your home. And so there may have to be sacrifices of what your dream home was going to be. in order for it to fit within your budget. Because, again, we want your income to do more than just go to a mortgage payment. That's why that 25% is so key.

So again, it may not be the dream house that you always wanted, but it will give you peace of mind because your budget will be under control. And finally, the fourth step in figuring out if you can afford a bigger home is to consider your budget categories after all is said and done. So will your utilities increase in a new home? Are there upgrades or renovations you want to make? Is there going to be a new water heater that needs to be replaced or the HVAC? How is that?

Will your commute be longer to work so you need more money for gas? Do you have significant debts that still needs to be paid off? I mean, all of these expenses need to be calculated before you sign that dotted line. So be really thoughtful and be really intentional and lean on the resources that you have. So I recommend talking to a Ramsey trusted real estate agents. They will walk with you through every step of the home buying process. They're such an amazing resource. So whether you're a first-time home buyer or a veteran homeowner, make sure to check them out.

You can get connected with one today by going to ramsysolutions.com slash trusted. Today we're going to talk about the fire movement. And if you're not familiar with this, fire stands for financial independence, retire early. And obviously, I'm all about financial independence. And I'll admit, retiring early sounds pretty great. But like most things, if they seem too good to be true, sometimes they are. So we're going to unpack it. And I'm going to react to a video of a couple who plans to retire at 35 years old, which is a pretty radical goal, you guys. And I'm just so

curious what their level of sacrifice looks like in order to even make that possible. So we'll unpack that together. And also, I want to talk about what I recommend that you do if you want to pursue a fulfilling stable retirement, like most of us do. All right, let's see the first clip. I don't really like to buy anything, and in fact, it kind of makes me anxious. Every year or two, I'll get a new pair of running shoes. The last time I bought running shoes is actually a used pair. We've decided to invest in maybe cheaper hobbies than most people. As eclectic as ever.

Okay, well, first of all, Tanner seems really happy, and he definitely looks happier than I do when I'm running, so good for him. But something he said that stuck out to me is that he said, buying things makes me anxious. And then he goes on to say that he does everything he can to not spend money to the point of buying a pair of used running shoes. Okay, so right off the bat, his mindset is a little different than mine because for me, using a monthly budget and living on less than I make and controlling my spending gives me the freedom to be able to spend some money on things that mattered to me. So again, whether that's generosity or making a memorable family

vacation together or even a little Amazon package here or there that sparks some joy. You know, whatever it looks like, I want to be able to use my money intentionally for the good things in life. And personally, my goal is not to completely minimize all spending all the time. So my first impression is that we may be a little different here in our goals, but let's keep watching. My name is Tanner Furrell. I'm 29 years old. I live in Minneapolis, Minnesota. I plan to retire at the age of 35, and I've saved $380,000 for retirement. Okay, so in this clip, he explains that he's 29 years old and currently has $380,000 saved and plans to retire by 35. It's interesting because I'm curious if he has enough to live on, right, when he retires.

So I'm kind of curious about the rest of his plan. So let's see the next clip. My personal brokerage account has $221,000 in it. My Roth IRA has $57,000. My health savings account has $26,000 in it. And my 401k has $75,000. A lot of people in the fire community have really definitive fire numbers.

For me, it's a little bit more flexible. My lower bounds for retirement is $625,000 because I figure I need about $25,000 a year to live. Okay, so here he breaks down exactly where that $380,000 is coming from based on his multiple retirement accounts. And he also mentioned earlier in the video that he's a part of what's called the lean fire community. And this means that he's part of a group that wants to reach retirement as early as possible, even if that means drastically changing their lifestyles to reach that goal.

And he said he's aiming to hit $680,000 saved in retirement so that he and his family can live on $25,000 a year. Oh, I mean, if that's what you want to do, go for it, right? I don't think it's like a right or wrong. But again, this idea that we're going to retire early, you think of retirement is like taking vacations and traveling and visiting family all over the country, and you can't do that at $25,000 a year.

So that's one thing. Okay, and another thing that I'm wondering about is that earlier in the video, he told us that he makes $135,000 a year as a software engineer. Then he says that he's currently saving half of that every year. So my question is, when he retires, he's going to go from living on $65,000 a year to $25,000 a year. So they're cutting down their stuff even more.

And then again, even if they're paying on debt of some kind, so I'm interested to hear more. My parents just gave me a loan directly. So when I graduated from college, I worked on paying that off for a number of years. I believe the interest rate was 3%. It took me about five years to pay my parents back. I could have done it faster.

had I wanted to, but I figured that the difference would be better spent investing in index funds. Okay, that answers my question about student loans. Yep. So it sounds like he borrowed money directly from his parents and then paid them back over five years with an interest rate of 3%. And he says that he could have paid them back faster, but instead put money towards index funds. And that's a big common thing that a lot of people say, well, I'd rather invest my money and make more interest, earning more interest than I would what I would pay down my debt. So they try to kind of justify that, where, again, I'm all about debt elimination, regardless of the interest rate or regardless of the amount, because having no debt and not owing anyone anything is even better than having money

and letting it grow. So that's just my thought. I took fire to an extreme that I think generally it's safe to say is unhealthy. I would get very, very anxious about saving as much money as can really, really anxious about making more money so that I could retire as early as possible. I put things off in my life that I really wanted to do in order to try and retire even earlier. I would spend all of my free time trying to make money. I had these ideas for side hustles, and I was doing those things not because I enjoyed them, but because I thought that I'd make a lot of money. and when those things weren't panning out,

it led to a lot of frustration. All right, this clip was a little bit of a longer segment, but I thought this was so fascinating, you guys. So he admits taking this mentality to the extreme, especially in the beginning. And he talks about how making as much money as possible just wasn't fulfilling. And I totally agree with him on that one.

I'm a big believer in balance, and it's important to be wise with your money. But it's also important not to become so, so anxious over it to the point that you're like hoarding it or overworking yourself just to earn more and more and more and more, right? Because that can leave you really unfulfilled at the end too. So actually, I really agree with you, Tanner. All right.

In the next stretch of video, it's several minutes long, but I think it's really relevant to a lot of you who are working the baby steps. So I'll do a recap of what he says. So first, he says that they were able to pay off their full mortgage by renting out the downstairs part of their house on Airbnb. that's some money coming in. Second, he mentions that they participate in a food donation program in their city that gives people a carload of unused groceries for $25 a month, which is amazing.

And I know people that do similar programs with garden sharing and all of that they have in their neighborhoods. And he even shouts out rice and beans specifically as a healthy option. Dave, you'd be so proud of Tanner. All right. And then finally, he says that once their friends and family caught on to their frugal tendencies, everyone started binding and offering them free furniture and other supplies like strollers and electronics. It's really interesting. You know, in my book, Know Yourself, Know Your Money, I talk about money tendencies.

And for some people, they're more that like scarcity mindset. Some people are more abundance mindset. So if you're kind of interested in this fire movement, I would be curious where you fall on the spectrum. Because I think it's just a fascinating thing to understand how you're wired with money and certain people are more drawn to these things than others. But this is just a testament to exercising financial boundaries, you guys. And eventually people not only accept their money goals, but they were able to help them get there, which is really encouraging.

All right, let's hear what he has to say at the end of the video. So one more clip. I think a lot of people look at the fired movement, and they think that a lot of these people are just not living their lives at all because they are just so busy stashing away money. I don't think that's a fair representation, because in life there's no short supply of experiences. Most experiences that will make you happy are probably free

or extremely cheap. Obviously, money can put a roof over your head, put food on the table. But when you're saving money, you're essentially buying freedom. So the best way that you can spend excess money is ironically by saving it to give you more time in your life back. Okay, yep, he speaks a lot of truth here.

So in the end, is best spent on experiences and creating more time and memories with loved ones, which I agree. And I'm glad that's where his focus seems to be, because I'll be honest, that's a thing that gave me pause with the fire movement, that even if you're retiring young and living on really little, can you provide for the experiences that you want in life. So I do wonder if living on less than $25,000 a year is the best option throughout all the years of life. And like, will he ever missworking and producing something. I don't know. Because I know people who, you know, were wise enough with their money to be able to retire early and they got into their late 50s and 60s,

and they were bored. They actually went back to work because they wanted to do something with their life. So I think there's a rhythm of working hard that's just good for our character. And I think keeps you young still. So, yeah, it'd be fun not to have to be dependent upon that income when you're older like that and have the money to retire. I think that's a noble goal and one that we teach in the baby steps, but I'd be interested to see if Tanner and his wife kind of navigate all of that here in the next few years. So I don't know, you guys, it's a really interesting thing. I think there's parts of this movement that I really love and I appreciate their intensity and their focus, but I don't think like running away from a job or a career is always the answer. I think you can

find a job that you love, letting it be part of the rhythm of your life. But I also understand having choices and options to go do what you want to do is really empowering. So I think working towards both is kind of that key thing. But again, getting out of debt, not owing anyone anything, that's a big part of having that autonomy and having options in life. And that's what we teach here at Ramsey with the baby steps. So I think it's fascinating. And if you thought it was fascinating, and also if you're impressed with Tanner's investment habits, remember it's never too early or too late to save for your retirement. So you want to be able to do this as quickly as possible. So go to Ramsey Solutions.com and there's an investment calculator there that gives you a picture.

of how your money will grow over time. And the earlier you start, even with a small amount of money, the better it's going to be thanks to compound interest. All right, you guys, it's a very fun movement to look at the fire movement. So I want to hear from you guys comment below on if this is something that you would ever take on or if your approach is different. So I think it's pretty clear.

You can still retire with dignity and enjoy retirements and still have fun in your present life too. So I think both are possible. Well, thank you guys so much for listening. And if you would leave a review, that would be so, so helpful with the algorithm and getting the show in front of new people so they can listen and take control of their money is one of my goals. So leaving a review helps with that.

And share this podcast, share this episode with a friend who may enjoy it. Well, thank you guys again for listening. And remember to take control of your money and create a life you love.