The Rachel Cruze Show - Master Class on Financial Literacy in 8 Minutes

Starting point is 00:00:05 Financial literacy is step one when it comes to building wealth. And believe it or not, it's simpler than most people think. So today I'm giving you the crash course in all things personal finance. Make sure like, subscribe, and show this episode with a friend. All right, first and foremost, you have to start budgeting. So what a budget is is a plan for your money. You can budget annually. You can budget weekly. I recommend budgeting once a month. So you're going to look at the amount of money that you're going to make in the following month. You're going to list out all the categories in which you spend money, put dollar amounts next to each of those categories, and that includes giving and saving.

Starting point is 00:00:44 And their goal is for your income minus all of those expenses should equal zero. And so that is called a zero-based budget where your income, every dollar of your income has a category that they, it knows what it's doing. Now, some people have budgeting where it's like percentage-wise and all these different formulas and stuff, a zero-based budget is the best. Doing a budget, though, in general, you guys, this is the first step of getting control of your money. Knowing where your income is going is so important because you're going to use your income to pay off debt and to invest and to save and to give. But if your income doesn't know what it's doing because there's no plan, it's not going to do any of those things.

Starting point is 00:01:18 So that is one of the basic things. It is, I don't know, fifth grade math, fourth grade math, income minus expenses. And if you need help with this, every dollar, it's my favorite budgeting app. It's great because you carry your phone with you everywhere. So your budget is always with you. So budgeting is number one. Number two, live without debt. Listen, debt is the norm.

Starting point is 00:01:38 It is so common for people to carry credit card debt and student loans and car loans and personal loans and all of this stuff. But what you don't realize is how much your debt is costing you. Because your income coming in, instead of you using it to build your own wealth, you are getting other people and other industries really rich. Because when you are in debt, you are paying interest and you are paying that, which is a fee on the, top of what you already owe. And because of that, you are spending more money than you would have if you just saved up and paid cash for it. And so there's something powerful about being out of debt. So not only from a mathematical financial side, but also an emotional side. There is something to be said of autonomy, of having all of your income and you get to decide what to do

Starting point is 00:02:20 with it. Now, if you are in debt, here's how you get out of debt quickly. List out all of your debt, smallest to largest, regardless of the interest rate, pay minimum payments on everything, and pay off the smallest debt first. Once it's paid off, take all those payments over to the second smallest debt. So we don't do it by interest rate because money is not always a math issue. It's a behavior issue. And getting those quick ones is going to encourage you, keep you motivated, and keep you going. All right, number three, make sure you have savings.

Starting point is 00:02:50 And so when you're looking at building wealth long term, you can't do that until you have short-term savings available. because if you don't have savings available and something happens because something will happen, it's called life. Things are going to happen. If you don't have money to help a situation, you're going to go into debt. And so you're going to go backwards. Getting an emergency fund is so important.

Starting point is 00:03:12 So you want to start off with a $1,000 emergency fund. Once you are out of debt, bump that up to three to six months of expenses. And you can keep this in a high-yield savings account, which is great because you're going to get better returns than just a traditional savings account. but you also want to be able to get to it. But if you invest it, you'll probably get, you know, a higher return, but there's risk in it. And so being able to get to that money quickly if you need it for an emergency is really important. Now, the last two steps are game changers.

Starting point is 00:03:42 But before I share, I want to tell you about one of our sponsors, delete me. If you don't remove your personal data from the Internet, it's basically on a billboard for everyone to see. And that's your name, your address, your email, even your kids' names are out there on sketchy data broker sites. And data brokers collect your data, sell it, and that puts you at risk for scams and fraud. But the good news is, delete me removes your data, helps protect you from fishing, harassment, and other online threats. Your family's safety and financial security are way too important to leave exposed. So go to join deleteme.com slash Rachel for 20% off their annual plans, bringing your monthly cost to under $9. Or just click the link in the description. All right, number four

Starting point is 00:04:25 is invest in the future. So once you are completely debt-free and you have your fully funded emergency fund, you want to start investing 15% of your income into retirement. So specific retirement accounts are great because a lot of them are tax-favored. So when you think about a Roth IRA,

Starting point is 00:04:43 the word Roth is amazing because it means you invest money after you pay taxes on it and any growth in that account is tax-free when you take it out, which is a game changer. Because if you start early, there could literally be millions of dollars in there

Starting point is 00:04:54 that are tax-free. It's amazing. Now, if you don't do a Roth and do a traditional, that means the money's coming out before you pay taxes. And that means anything on the growth, you will pay taxes. So when you can do a Roth, it is incredible. And a lot of people will roll their traditional investments into Roths, but you have to pay the taxes when you do that rollover. But those taxes will be cheaper today than they will be in 20 years when you got a lot of money in there because of the growth. So if you can do a Roth 401k at work, anyone can do a Roth IRA if you're earning an income. Those are some great options. But if you have to do traditional, that's fine too. If that's your only option, like a traditional 401k at your work, that's awesome if you can do that. But these are really

Starting point is 00:05:33 going to help you when it comes to retirement specifically. So always remember this formula. Match beats Roth beats traditional, meaning your 401k or 403B at work, they're going to, usually, they will match you. So if they match you up to 4%, go ahead and take that match, match up to 4%. and then the rest of your money, I would put into a Roth IRA. And if you max that out, you can go back to a 401K. So match beats Roth, beats traditional. So that is the order at which you want to do retirement investing. And then anything above that, after you've done that and after you've paid off your house and all the things, you can do other types of investing.

Starting point is 00:06:15 You can invest, you know, you can get a brokerage account. You can do some stuff. You can do some index funds. You know, there's other places that you can invest that are safer, nothing crazy. I don't want you out there like gambling and, you know, dip it into stuff that's new. You always want to have things that have a long-term track record. But there's some other options. But again, starting out with retirement investing first and foremost, incredible.

Starting point is 00:06:37 There are so many millionaires out there, you guys. And they're everyday people, and you ask them what they've done. And so many of them will say, we just funded our Roth IRAs and our 401Ks over decades. And then they retire with millions. And it's amazing. So it is such a great plan. Make sure you do that. yourself in a position where you're debt-free and you have an emergency fund so you can start

Starting point is 00:06:57 investing soon. And last but at least, you do want to buy real estate when you're ready. Now, if you don't own a home now, I would save up for a down payment before you start doing investing like we talked about. But once you're debt-free and you have a fully funded emergency fund, then start saving up for a down payment. So a couple things to remember with this. Ideally, you would have 20% to put down. But if you're a first-time-home buyer, you can go down to 5%. And make sure the mortgage that you take out is a 15-year fixed rate and that your payment is no more than 25% of your take-home pay. So a fourth of your income should be going straight to your rent or your mortgage. Remember that. Anything more, it starts eating into your budget, which means that

Starting point is 00:07:39 you're not having as much margin to do other things. Now, if it's smaller than that, amen, hallelujah. But in today's world, probably not going to happen. Now remember that formula and become a homeowner because owning a home needs to be part of your overall financial plan. All right. So when you go back and start at step one, budgeting, and you go from there, I actually have an episode on how to create your first budget in five simple steps. So this is a great episode to start off from the beginning. Again, budgeting.

Starting point is 00:08:07 Check that out right here. Or if you're listening on a podcast, I'll put a link below. Okay, so remember to take control of your money and create a life you love.

The Rachel Cruze Show - Master Class on Financial Literacy in 8 Minutes

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