How to Adapt When Your Income is Cut In Half | Making a Millionaire

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0:44So people can see your thing, feel your thing, love your thing. The next thing you know, it's a thing. Canva, the thing that makes anything a thing. Perfection doesn't exist for anybody. You can have a lot of mistakes and there's still tremendous margin for success to come out the other side. And I think that's what we're going to hopefully uncover for you today, Rachel, as we go through this, is that, yes, there's a big step back with this big life change. But how do we make you fulfill those three big goals that we kind of uncovered? But also you came out the other side feeling much better and with purpose.

1:2745 years old. That's right. $362 ,000 net worth. You make about$120 ,000 a year. Yes. Sounds like you're in a fantastic spot and it's been just a super easy journey from just straight from where you were to where you are now, right? Yeah, no problem at all. That's the way it went. Yep. The good news is I don't want to be a millionaire. So you guys, this may be a quick, easy, check the box, we're done. We're out of here. Why don't you want to be a millionaire? Was being a millionaire a bad thing? I don't know. Maybe. Oh, maybe being a millionaire is a bad thing. I guess it depends on how you use your money.

2:01Depends on what a million dollars means for you, right? Yes, exactly. Yeah. For me, I don't think I need a million dollars to be happy. Well, I know I don't because I'm happy now and I don't have a million dollars. I'm a public defender, kind of lifelong public defender. I love my work. I have two great kids. And how are the kids again? They are five and six, six and a half. It's very important. The halves are so important at this stage. I do not want to insult my daughter. My ex-husband and I got a divorce last year, so about almost exactly a year ago. So my financial situation changed markedly.

2:33You know, it basically is kind of cutting your income in half, but all your bills stay the same. So I've just been trying to reconfigure this past year and kind of figure out how to manage what I have now and what needs to go and what needs to stay. and I have had some, I guess, I want to think about how to do this year a little bit differently to prioritize some things that are important to me. What was life pre this like huge life change? Right. And then what has changed? Specifically around the financial stuff. Sure. Because I think you use the term reconfigure and rebuild. Yep. I want to dive into what was it like and then what is it like now?

3:14Sure. But what are some of these goals you have? Because you said, hey, I don't need a million dollars to be happy. And we would agree with that sentiment that we recognize money is nothing more than a tool that allows us to accomplish the things we want to accomplish. It's just the means to an end. It's not the end itself. So for some people, that's a million dollars. Some people, it's much less. Some people, it's much more. And so we are in alignment on that. No, I appreciate that. And that's why I've been drawn to your ideology because I think that resonates with me. Well, it's also, I mean, our big thing is own your time.

3:44I mean, and to own your time, Do you want to retire at some point? Yes. We have to have an army of dollars somewhere. Yes. Y 'all were in steps eight and nine. Am I getting this right? Oh, yeah. I think so, yeah. We've come a ways back. So still this thing had a cost to it. Oh, yeah, for sure. Yeah, I mean, I think, you know, it's just going to sound real spoiled. So I'm just going to say it. We just didn't really think about money. We just had it. Okay. And so there was a level of just doing what we wanted. You know, we had everything we needed and everything we wanted. I guess that's why I always question why people need more money because I felt like we didn't have a ton of money, but we had plenty.

4:22And so it was just different. I think that's really interesting because I think a lot of people go through that. They're in a season or stage where maybe income is good, maybe expenses are low, maybe health is good, relationships, whatever that thing is, and then something happens. In your case, it was a divorce. Sometimes it's sickness. Sometimes it's job loss or a move or a change. And then all of a sudden it changes. And there's like a mindset shift that happens. 100%. I started with this view of what it was going to look like and then something changed. Completely. That's exactly what it was like.

4:53I want to dive into that. When it comes to finances, what are your goals? What do you want money to do for you? So I think one thing I really liked about having money is when we saw something in our community that we thought would benefit from the money that we had, we just gave that thing money. Like philanthropy? Yes, exactly. If there's something in our community that needs help that aligns with our values, we just give them money, you know? And it just wasn't really a question. Obviously, we had conversations about it, but it wasn't like a question about if we had it. And I think in this past year, when I was kind of figuring out budgets, one of the things that changed is like my ability to assist in that way.

5:33And I love my community. I can tell people in Franklin are very proud of their community. I feel like that about my community, Waterloo, Iowa. and I just, I want to be useful in that way. And I feel like in the past year, I have not done that in a way that I'm happy with. Is being able to do more from a philanthropic standpoint, you mean, okay, what I want to do is I want to revisit my budget and I want to figure out how I can cut expenses as much as possible so I can give as much as possible or is I want to figure out how I can build a level of wealth so that one day I can write checks freely the way that I used to write checks freely.

6:05And neither of those are right or wrong. I don't understand what the goal is. Right. Well, and I don't know that they're mutually exclusive either. Fair point. I mean, I think, you know, it would be great to do both, but I think my immediate concern is helping now. How do I help now? Yes, exactly. And there are some institutions that I'm concerned will not remain if people don't step up to help now. Well, let me ask you some questions then because a lot of times I'll ask people, hey, what are your goals? And they'll say this one thing, which I love, and that's obviously the top priority. So I'm going to ask you about some other things, right?

6:36Do you want to retire one day? I sure do. So I'd call that a goal, right? Like I say, one financial goal would be working towards financial independence. For your kids, age five and six, do you have a desire or hope for one day them to go off to like higher education and college and that sort of thing? Yes. Is your intent that you would like to be able to assist with that? Yes. Okay, so we got, all right, we're at more goals. This is an exercise we encourage everyone to do, right? Money is nothing more than a tool that allows us to achieve our goals. We have to realistically list out our goals.

7:06Right. And in the pursuit of our goals, sometimes the pursuit of one goal will impact our ability to pursue another. And so we kind of list all of our goals out, and then we prioritize them. As we think about how we deploy our capital, we want to deploy it in the most efficient way to satisfy all the goals. Not funding one goal today at the expense of another goal tomorrow, if we can avoid that. When do you want to retire? I had kids late in life, so I feel like I'm in a weird spot. Because, you know, I'm middle-aged, but I have very young kids. My goal was to retire about the same time my son goes to college.

7:37Okay. But I don't know. So I would be like 60. Yeah, I'd be 60. Okay. So that's an intersection point because we all have these inevitable dates that will happen. So retirement at 60. Education, how much? You said they're five and six. Yes. So we have 13, 12 and 13 years. Yes. These are two things that we'll need to be taken into account. Pre-divorce, what was life like? Like you said, hey, we didn't really think about money a ton. Were you diligent savers? Were you saving for the future? Yes. Like maxing out retirement accounts, doing that kind of stuff. Doing all those things. If I remember correctly, maybe even like prepaying mortgage.

8:16Oh, yes. So you were kind of in like the step eight, nine phase of the financial order of operations, right? That's right. Like when we think about it, you kind of made it past all sort of the base level steps and you were there. Now this large life event has happened. And where are you now? Like if you had to assess, where would you say that you are in the financial order of operations? Yeah, I've been thinking about that a lot. I would think I'm probably more at like four or five. Four or five. Yeah, I think I'm back there. Is that where, when you went through the divorce, did you just fall back from eight to four or did you have to go all the way back to one?

8:48Oh, so that's a great question. Yeah, I kind of went back to one. I kept the house, but obviously I bought my ex-husband out of the house. Because I had saved so much for retirement, We had different levels of retirement. So I had to give him a chunk of money to even that out. So really, he got all the cash and I had the house. So yes, I was kind of starting from one. Like I needed to make sure I had enough for deductibles. I think I had like$2 ,000 liquid cash. I mean, it was like bare minimum. You know, so often when people think about the financial order of operations, they think about it as a straight line.

9:21I go from step one to step two to step three to step four, and I just kind of track up this mountain. And perhaps that even was your journey. Sure. Initially. Yeah. But then inevitably something happens, and in real life, when we see the way that food practically plays out, it looks a lot different. Yeah. Like, I'm in step nine for a bit, but then I went all the way back to step one. And then now I'm slowly building back. And so we thought it'd be interesting. We think about, okay, well, if we look at where you are now, your food journey kind of looked like this. Right. Right? Yeah. Right. Totally.

9:50Step nine down to step one, but now we are beginning to build. Yes. Now we're building back. We've got deductibles covered. We're going to talk in a moment about your match, which is a little bit different because of your vocation. Sure. You're rebuilding your mercy fund. So you are squarely in step four. So we're tracking back up the mountain. I just want to pause and say, that's okay. Oh, yeah. A lot of people, they get discouraged and frustrated. Sure. But this is what happens in life. And you were like a living testament to that happening and being okay. Totally. There's a path out of that.

10:23Perfection doesn't exist for anybody. Yes. I mean, this whole book is full of mistakes. And that's what I think is so great is that you can have a lot of mistakes and there's still tremendous margin for success to come out the other side. And I think that's what we're going to hopefully uncover for you today, Rachel, as we go through this, is that, yes, there's a big step back with this big life change. but how do we make you and fulfill those three big goals that we kind of uncovered, but also you came out the other side feeling much better and with purpose. Yes, no, totally. And I'm very proud, honestly, of the work that we've all done this year.

11:01And I'm very proud of my kids. You know, it's a change in how things have gone. And I think we've done a great job. But so, yes, I do not feel shame about having gone back. But of course, I want to keep moving forward. We've already mentioned, even with this large life event, your net worth is at like$362 ,000. When we look at your net worth statement, it looks pretty good. I mean, you said, okay, you've got about$22 ,000 in cash. You said that's about four months of living expenses. Our goal is to get to six. In investments, you have about$232 ,000 broken up between a 457 and a 401A, which is just all through the same employer that you're working with.

11:39You have your primary home, which is worth about$349 ,000. So on the asset side of the ledger, things look fantastic. Yes. That's great. On the debt side, it looks like you have two debts. You have your primary mortgage,$179 ,000, and$2.375. Wow. Good rate. Is that a 15-year mortgage? I wish it were. No. What type of mortgage is it? It's a 30-year fix. That's even better, though. Yeah, I know. I know. When I ask you, typically when I see rates that low, I always think it's a 15-year because typically 15 years are about a half a percent cheaper than 30 years. So if you'd have a 30-year, did y 'all prepay it?

12:15Did y 'all buy some points or something? That's a low rate. No, we just got it at the exact right time. Wow. And honestly, we talked about doing a 15-year, and that was 1.8. Holy cow. I mean, we watched the market pretty closely. I know. It was like pre-day. I mean, when we go and try to choose the bottom of markets, I think y 'all must have just stuck the landing perfectly. Yeah, we hit it. Yeah, we really did. We lucked out. That's an incredible rate. But you said y 'all were prepaying. Y 'all were like paying the mortgage off quickly. Yeah. What? We were trying. Okay. And I know you guys are going to be like, that was not a good idea, Rachel.

12:51You should have been putting more money in savings. Well, we're not about good ideas or bad ideas. We're about optimal ideas and suboptimal ideas. I love that phraseology. Do you still have a desire to pay off that mortgage? Yes, and I have been doing it. I know. And so that's my question. That's my big question. No, wait a minute. I see a high yield savings account there on cash. What are you getting paid on that right now? I know, 3.8. I know. 3.8? I know. We have a delta there of like, you know, a percent and a half. By the way, this isn't even because there's moments where you're probably making 5 % on that cash too, right?

13:20Yeah. Yes. I feel like I have anxiety related to debt. Like I just want to get out of it as soon as humanly possible. And so I'm overpaying, but I understand my margins would be larger if I weren't, and I may be able to meet my goals a little better. You were trying to do charitable work. Was it for the banks or was it for these organizations that you're doing? It's for these organizations. Okay, okay. I just want to make sure we're clarifying here, you know, because there is a spread here. Fair question. Thank you. We're going to put a pin in the mortgage for a second because you just said something.

13:48I want to get out of debts as quickly as possible. Your mortgage is not your only debt. You do have this other debt. There's a$60 ,000 loan from sister. What's that? Walk us through what that is. Yeah, so that was part of the settlement piece in terms of, you know, you could do the qualified domestic relations order. The Quadros. That's right. Very good. We elected not to do that. I did not want to fight about a Quadro. Okay. I just kind of wanted to wrap things up. And so that was our decision that I would just do a straight cash payment to my ex-husband rather than do a Quadro. From your retirement account.

14:21Yes. My sister, God bless. She's a lawyer who makes money. I've never heard it said that way. That's hilarious. I mean, as a public defender, you have to delineate, right? So she was very generous and loaned me$70 ,000 so I could make that payment to my ex-husband. So you've only paid$10 ,000 in the first year, right? Yeah, and she was very – I mean, she would let me take as much time as I wanted. Again, just anxiety about I don't like that being there. Are you paying that monthly or are you paying it yearly or just when you have money coming in? No, we have just a – I set up like through my account that she just gets$1 ,000 every month on the same date.

15:00Does she prioritize you going through the financial order of operations, or do we need to lean heavily into making sure your sister is paid back faster? Yeah. No, she's so kind. I mean, we – so, again, you guys are not going to like this. We originally had an agreement where I would pay her$700 a month, and then I got – once I figured out, like, okay, here's where my margins are, I felt like I would – I can pay more, and so I wanted to. So, we changed the agreement. Okay. And did a new amortization schedule. So the goal, as it's set right now, I would pay her off in spring of 2031. But we can treat this as low interest debt.

15:35There's not some asterisk next to it that there's a time certain for just relationship purposes. And she's sweet, and this is not like money that she – I'm guessing she doesn't even really think about it at all, you know? But it's more like I think about it. We're going to get her in next month for making a million. It is an interesting thing, again, just kind of thinking through where your goals are. Like you would agree that 3 % is low interest, right? And you would even concede that on your high yield savings, you're making 3.8. So there's an arbitrage there. Not that we want to take advantage of the sister or anything, but there's an arbitrage.

16:07But you did say, hey, one of my goals is like philanthropy today, present day. And we haven't talked about retirement savings or any of that kind of stuff. But just in my mind, well, there was$700 and it could have stayed$700. That would have freed up$300 a month for philanthropic purposes, right? Totally. I just want to understand the mindset. You said, I have one goal, and my number one goal is to be philanthropic, and I'll be philanthropic today to the extent that I can. But when faced with the opportunity to do that or get out of debt, you said, hey, I'm going to get out of debt more quickly.

16:36Yeah, that's such a good point. There is some cognitive dissonance there, isn't there? Okay. So it was likely more subconscious and unintentional than an intentional decision, right? Yeah, 100%. Yes. It was an anxiety-ruled decision. Got it. Perfect. Y 'all keep using these SAT words. I mean, we're going to have to go have a discussion here in a minute. Good at math. If you saw my SATs, not so good with some of the other SAT words. So now let's talk about your savings, the way that you build and the way that you. Now, you said you're a public defender. So the way that your retirement is structured and set up is a little bit different.

17:11Can you tell us a little bit about that? It's not like you just have a 401k like some people might be familiar with. Sure. So we have a system called IPERS, the Iowa Pension System. I'm sure it has other words in it that I don't recall right now. But basically, a part of my paycheck comes out every month. I think it's approximately$300, maybe$290. And then the state pays maybe like$430 or something each month. And then that's just set aside. So when I retire, there will be like a pension amount that I will receive monthly until I die. Is it based off of the money that you put into the system? or is there a different formula that determines what your pension amount is?

17:52It depends on when you retire. So the amount is markedly different. I could retire at 55 under our system, but I think I would get like$3 ,000 a month or something. So one of the things that we try to determine is, okay, your pension is based on your highest five earning years, and then there's multiple factor based on how long you've worked there, like what's your age is, how many years you've put in. And so we said, okay, well, let's kind of estimate what this looks like. And you said, right now, your income is about$120 ,000 a year. And we said, okay, what if we just assume 3.5 % wage growth?

18:26Like just fairly conservative, inflation-adjusted wage increases. By the time that you get to 65, we're going to use 65 as our base level assumption here. Your projected monthly benefit at age 65, if we assume that 3.25%, I'm sorry, I said 3.5%, we use 3.25%, annual wage growth, about$10 ,254. That'd be pretty good. That sounds pretty good, right? It's a future value though. It is a future value. So when we think about that,$10 ,254 at that point will not feel the way that$10 ,000 feels today. Sure, of course. So that would be the equivalent at age 65 of about$5 ,700 today. What's your burn rate?

19:02Do you know what you spend on a monthly basis to do the things you want to do the way you want to do them? I try to spend no more than$5 ,000 total. So I would be totally fine there. So if we have$5 ,700 coming in, that's great. One of the issues, though, with the IPER system is that there are no cost of living adjustments on that. So once your pension starts, it's kind of locked in at that number. So we don't just want to think about year 65. We want to think about age 70, 75, so on. So we just want to kind of model for you, as you go through time, the purchasing value of your pension goes down.

19:39As you can see, it starts at$5 ,700 a month in today's terms. But as we go through time, the purchasing power of those dollars becomes lower and lower and lower. Well, likely your lifestyle will either stay the same or when you retire, hopefully it would actually increase a touch. So we have these two things moving in different directions. A lot of times we have people ask us this question. Hey, if I have this big pension and I'm able to get the average five, why would I save anything else? Why would I continue to build? This is why, right? Makes sense. So I think we agree. Your pension is going to solve a huge chunk of your need in financial independence, but it's probably not going to solve all the need.

20:23Is that a fair statement? Well, and also there's an underlying risk that's sitting out there that if we went through, and I don't know that we will because typically high inflationary strikes, you know, I've lived through two now. Oh, hi. Because the late 70s, early 80s, and then during the pandemic period that we had this huge run-up of inflation, you're running some risk. As long as inflation went back to normal or below average, your pension is actually going to be great. Yes. But we do run a risk that if we have any extended periods of higher inflation, it does minimize the value of this future promise.

20:58Sure. Because that's what you're trading. You're trading in some of your earning potential. Yes. So that you can get this promise from the government. And the promise, depending upon what the purchasing power of dollars is in a many decade in the future, it is a big question mark. Sure. So that's one of those things. As a financial planner, we're always like, well, we have to try to figure out what's the counterbalance. Because this is a blessing. But how do we add something so that we don't have to put all of our eggs in one basket? And that's where we're going to talk to you about trying to, once again, using the financial order of operations.

21:34How do we build something in the background to kind of be a flex system on what's going on with the pension plan? And it doesn't seem like this is news to you because if you look at your savings as priority again, you are currently contributing to some of the defined contribution account. You are putting money into your 457. There's money going into your 401A. So you can see that all in, if we just kind of remove the pension from the equation, you are saving and investing or have a total amount being invested on your behalf of about$3 ,000 a month. So if we just take the amounts that you have in your retirement accounts now, plus that level of savings, when you look at the portfolio path, we go from$232 ,000 today, and this is assuming a very conservative 6 % rate of return.

22:19When you get to 65, just that level of contribution is going to get you to like$884 ,000. Okay. Now, again,$884 ,000 in the future won't be worth the same today. It's going to mean something different, sure. So if we bring it back in today's dollars, that would create annual retirement income for you of about$20 ,000 a year. Oh, wow. Right? So if we just take$20 ,000, divide it by 12, it's about$1 ,600 or so a month. But now in retirement, we're starting to stack. So we have our pension coming in, and then we have some portfolio resources we can use. are, well, now at age 65, if we think about today's dollars, just based on what you're currently doing, you're on track to have like$7 ,300 a month.

22:59And the beautiful thing is your portfolio assets, those do keep up with inflation. So it will retain purchasing power, but we still have a little shortfall as we get into the later years. We get into the 80s and 90s, we're falling below that like critical 5 ,000, assuming that's like about what you spend. So we do still have a little bit of a shortfall we have to make up for. But in true Billy Mays fashion, but wait, there's more. There's more. There's more. Because one of the things that a lot of people, and I don't want to say controversial, but some people are more certain of it and some people are less certain of it.