Money Rehab with Nicole Lapin
“I Want to Achieve My Financial Goals Within Five Years. What Should I Be Doing Now To Get There?“ (Listener Intervention)
Mon, 18 Nov 2024
You know what you want your financial future to look like… but how do you get there? That’s the question today’s Money Rehabber is struggling with. Today, Nicole helps her build a roadmap you can use to meet your financial goals. On this road, you’ll need a financial bestie. That’s where Bank of America comes in. Find all the tools and expert guidance you need for your financial present and future at http://bofa.com/NewProsMedia
Chapter 1: What financial questions are on your mind?
I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab. So I've been doing this whole financial education thing for over a decade. And I have to say, the economic landscape has never been harder to navigate.
And so Bank of America and I are teaming up to help you money rehabbers answer the big financial questions that are on your mind right now. Like, how do I talk to my friends about money? Should I combine finances with my spouse? How do I make my money work harder for me? You know, all the biggies.
So Bank of America and I are doing six episodes together where I talk with real money rehabbers about their financial dreams and navigating this economy. You're about to hear the first episode and it tackles the topic of how to live the life you want now while also building toward the financial future you want for yourself.
When you're setting out on a path to financial freedom, you're inevitably going to hit a fork in the road that divides you from what you want right now and what you think you should provide for yourself in the future. That's what today's money rehabber called me to talk about. She feels like she's at that fork in the road and she needs help deciding which way to turn.
Chapter 2: How can I balance present spending with future goals?
The good news is she doesn't have to choose. With a thoughtful, intentional spending plan, which is what I call a budget, by the way, because it sounds more fun, you can set your future self up for financial success and enjoy the present, which is exactly what I want to talk to her about today. So here's how it went down. Max, welcome to Money Rehab. What's your question?
I'm feeling pretty good about where I am right now in terms of how much I'm making and I feel like I'm able to live the life that I want right now as much as someone in my early, early 30s. But I wouldn't be able to just like fast forward 10 years and live how I want to live when I'm 40, if that makes sense. Like I want to buy a house someday, but I couldn't now.
So I want help figuring out what I should be doing to set myself up to be able to meet my financial goals that will later come.
Well, I love this question. But before we can talk about how to get the financial future you want, we need to talk about what you want for your financial future. So can you describe what your dream life looks like?
Well, I work in marketing and I'd like to have my own firm someday.
I love that. Okay, cool. So let's get a little more granular. You mentioned that you want to buy a house. Do you want to buy a house where you are now? Or do you want to move to another city? Do you want to have kids? Do you want to retire early? Do you want to work till you're 92? I mean, tell me all the things, Max.
Right. Fair. I live in New York City and I don't really see myself buying an apartment here. It's just like way too expensive for what you can get. I think I would move outside of the city, but stay close. I'm not exactly sure where that'll be. And yeah, I do want to get married. I do want to have kids. I have two sisters and we're really close. So I've always kind of pictured having three kids.
I don't feel the need to live in a super rich and crazy luxurious life when I'm older. But I do. I know I don't want to worry about money. I want to feel like I can always get what I need. I think that building up my firm is going to take time. So I'd rather not. have that be really successful than retire early.
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Chapter 3: What does your dream financial future look like?
And when you picture buying this house, how old are you in this picture? Is it 20 years from now? Is it 10 years from now? Five years from now?
I'm 31. And I'd like to buy a house before I'm 40. So I guess I'll say I'm shooting to buy in five or six years, I guess.
Awesome. All right. Well, unfortunately, dreams have price tags. Do you have a sense of how big you want this home to be? I'm just trying to get a sense of what our budget is here.
Well, let's say I do have three kids. I'd like everyone to have their own bedroom. So I guess a four bedroom? They wouldn't necessarily all have to have their own bedrooms from birth. Growing up, my family lived in a four bedroom house and I shared a room with my older sister until I was maybe eight-ish. And then the spare room was used as a guest room.
I'm not really looking at real estate just yet. But I do know everything is expensive. But because I'm flexible on the location, I'm not tied to living in a super expensive area. But realistically, I don't know. Do you think 750K is reasonable?
Yeah. I mean, as you're talking, I was doing some searching around and I'm seeing four bedroom homes for 700 K in Staten Island, Jersey city. I'm seeing a really cute home for 600 K. I mean, who knows what's going to happen in five years? Real estate does tend to appreciate, but I think 750 K is a reasonable budget. Okay. This is great news.
We now know what we want and when we want it, we just need to figure out a plan to get there. So in order to make a realistic plan, let's talk about your financial picture right now. How much money are you making?
I make just over $100,000. That's amazing.
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Chapter 4: How much do I need to save for a house?
I know you said that you eventually want to start your own firm. Are you happy with where you are right now?
Happy enough. I don't want to start my own firm because I don't like where I am now. It's more that I want to build a business that's mine and be able to run it in the way I want to. Yeah, sister, you don't have to tell me.
I totally get it. So you're not planning on leaving this job, the 100K job, anytime soon? No, I'd like to stay here for a while. And you mentioned you're renting right now. How much are you spending on rent?
I pay around $3,300 a month.
And besides housing, what are some of your big expenses?
I guess just utilities like electric, internet, and my phone bill. So how much would you say you spend on all that a month? I should probably know that. Maybe $300. Cool. And do you have a car? Doesn't sound like it. No, I don't. I take public transportation to get to work. So that's like Five bucks a day. Nothing crazy. Do you have any debt?
I have about $20,000 left on my student loans. That is one expensive, beautiful brain you have there, Max.
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Chapter 5: What is my current financial situation?
Yeah, seriously. And I got in-state tuition too, so it wasn't even as crazy as it could have been.
And how much are you paying off your debt a month? It's about 380 bucks a month. So when we think about those big expenses, plus other things that come up, of course, going out to dinner, ordering in, meeting friends for drinks, whatever it is, what do you think your average monthly burn rate is? What do you mean by burn rate? Like how much do you spend a month on average? Including rent?
Yeah, let's include rent. Probably like 5k a month. Okay, cool. So after taxes, what's your monthly take home pay usually?
It's around $6,000 a month.
Okay. So the math here is easy. It sounds like you have about a thousand bucks a month left to play with. What are you doing with that thousand bucks right now? Are you saving it? Are you investing it?
I'm putting it in a savings account.
How much do you have in there right now?
I have around 10K in there.
Just like a regular savings account or a high yield savings account?
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Chapter 6: How can I best utilize my monthly savings?
That's great. So I'll tell you how I think about budgeting for the future and my future goals. And then you can tailor what I do to fit your needs and goals and wishes and desires and all that good stuff. So I created a spending plan for myself and I divvy it up into what I call the three E's essentials and game and extras. Essentials are all the things we talked about.
Housing, transportation, groceries, all the need to haves. The extras are the nice to haves. These are all the things that you like, but you don't necessarily need. So eating out, ordering in, baller vacations, whatever does it for you. The end game is the thing we can often forget about.
That's your retirement and your long-term future goals, like having those three kids, buying that four-bedroom house, building a firm, retiring on the beach somewhere, when you're ready, of course.
okay so when i was your age a hundred thousand years ago um just kidding but uh when i was your age i put seventy percent of what i made toward my essentials fifteen percent toward my end game and fifteen percent toward my extras but in this economic climate i see more of a case for the 50 30 20 rule which you may have seen and following this rule would basically mean 50 of your income toward essentials 30 of your income toward extras 20 of your income toward your end game
So between the $3,300 for rent, around $300 for utilities, $380 for your student loans, your essentials are at $3,980. And that doesn't include groceries. So let's call it more like $4,780. But you said your burn rate is $5,000 a month. So let's say the delta or the difference between the $5,000 that you normally spend and the $4,780 that you spend on essentials is what you're spending on extras.
So it sounds like you're spending about $220 on extras. Okay. So crunching the numbers, you're spending about 79% of your total take-home pay on essentials, which is a bit higher than the 50% we laid out in the 50-30-20 rule. If you shoot to bring down what you're spending on essentials, you can allocate more towards your future goals while also treating your present self.
of course your biggest expense right now is rent that is typically the case usually experts say your housing costs should be no more than 30 of your take-home pay right now you're spending more than 50 of your take-home pay on rent which is not unusual in an expensive city like la or new york but i think what you need is to start taking into account your future self if you want to buy a 750 000 home in five-ish years you're going to need to put 150k down
for a down payment if you want to put 20% down. And right now you have about $10,000 saved. If you amortize what you need to stash away for a down payment, you're going to need to put $28,000 per year aside for that lump sum. Now you don't need to put 20% down. And if you're a first time home buyer, you can probably get a first time home buyer loan and put a lot less down.
But that just means that the principal on the loan, the chunk that's accruing the interest is going to be bigger. So just something for you to keep in mind. So let's rip off the bandaid here. You're saving $1,000 a month or 12 grand a year. If I were you, I would be asking myself, how can I essentially double the amount that I'm saving?
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