Building a Guilt Free Budget (Listener Intervention)

0:00Nicole Lapin:Summer adds up fast. A dinner here, a couple concerts, a trip to Las Vegas, followed by one to France, has me wondering if I'm getting the most out of my money. I want to make sure that I am maximizing the benefits I get from my cards and getting the best interest rate possible on my savings account, all while avoiding those fees that can totally cast a dark cloud over your summer. That's where Chime comes in. Chime is changing the way people bank. They're not like traditional banks that love to gatekeep the best rewards and pile on hidden fees unless you have a massive balance. Chime offers the most rewarding, fee-free banking, all with no overdraft fees, no monthly fees, no minimum balance fees.

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1:21Nicole Lapin:Qualifying direct deposits required. Terms and limits apply. Go to Chime.com slash disclosures for details. This summer took me from a conference in France to some of the most beautiful beaches in the Pacific. Every destination had its own rhythm, from quiet mornings by the ocean to evenings spent discovering local cafes, hidden restaurants, and places you'd never find unless you were there. Back home, my city was hosting some of the biggest games in the world. While I love trading packed stadiums for sandy beaches, I also knew thousands of fans were traveling in for the opposite reason, eager to soak up the atmosphere and be part of the excitement.

1:58Nicole Lapin:That's why I listed our space on Airbnb. And what makes that idea feel much more manageable now is the co-host network. You can connect with a local co-host who has hosting experience and can help take care of the important details. A co-host can help create your listing, manage reservations, message guests, and make sure everything runs smoothly for guests during their stay. Honestly, it just feels like a practical way to make better use of our space while also bringing in a little extra cash from time to time. If you're interested in hosting and want help getting started, find a co-host at airbnb.com slash host.

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3:54Nicole Lapin:Indeed.com slash podcast. Terms and conditions apply. Hiring now? Then this is a job for Indeed-sponsored jobs. I feel like I'm so overwhelmed by just everything being out there and like news outlets, social media. I feel like I need to be doing better. It seemed like I'm behind. Today I'm talking to Kate. She has some good money habits, but she wants to know specifically what she should be doing now to better set herself up to reach her money goals. I think I do best when I have a goal. Every time I say a goal, that goal just keeps moving further and further and further away. Your first 100K saved is the hardest, but that is actually the level where compounding gets very exciting.

4:32With a high yield savings account, I really want to build this up.

4:36Nicole Lapin:I'm working with SoFi because I truly, truly legit love theirs. Every dollar is maximized up to eight times the national average savings rate with eligible direct deposit. So that means every dollar is working smarter. Is it common over time to look at a certain stock and just go all in on that? I never say go all in on a single stock. It's just too risky. What's great about index funds or ETFs is that it's a basket of a bunch of different stocks all with one purchase. I feel like it's money and finance is a never-ending game. I want to be able to have the end of the month end and still feel like I have a cushion underneath me.

5:16Nicole Lapin:What would you say is your biggest financial goal right now? I would say...

5:26Nicole Lapin:I'm Nicole Lappin, the only financial expert you don't need a dictionary to understand. It's time for some money rehab.

5:41Nicole Lapin:You guys, I'm so excited. I'm about to do one of my most favorite things, which is talking to a money rehabber who has a wealth question. And today I'm talking to Kate. And as you'll hear, she wanted to talk to me about leveling up her finances. You know what? My DMs are full of people asking the very same thing. And I love this question. Okay, to be honest, I love all money questions, but this truly is one of my most favorites. We work so hard for our money. I think we need to make sure that it is returning the favor. And no matter where we are on our financial journeys, there is always something we can do to take us one step further.

6:13Nicole Lapin:Kate knows she has some good money habits, but she wants to know specifically what she should be doing now to better set herself up to reach her money goals, like being a better investor. And perhaps most of all, she wants to know what she doesn't know, don't we all? We dig into that and a lot more, so let's get into it. All right, Kate, welcome to Money Rehab. Yeah, thank you. Thank you so much for having me. I love that you're here and I love that you have some money questions about leveling up your finances, like once you have an emergency fund, now what, right? Do you mind if I ask you how old you are?

6:49Nicole Lapin:Yeah, no problem. I'm 22. First of all, to be 22. Amazing. I have to give you mad props because I would probably give anything to go back in time and tell my 22 year old self to have your financial mindset. So you are already killing the game. That's so great to hear. I feel like it's each day. It's like something new. I feel like I'm so overwhelmed by just everything being out there and like news outlets, social media, and just being so involved in my 20s. So it's like to be here today and just ask some questions is really what I need to hear. And it's nice to hear that I'm not behind and I'm only 22.

7:33Nicole Lapin:You're only 22. You have so much time. And we can talk about how time really factors into compounding interest, which is the most beautiful force in all of finance. So help me get a sense to whatever extent you're comfortable with what's coming in and what's going out right now. Yeah. So I started my first real job about six months ago. And really before then, I never had much. Everything I made, I spent right away. There was no retirement funds. There was nothing like that. It was working at an ice cream shop, which I deeply miss now. So now I'm just trying to save for retirement with my paycheck that comes every two weeks, have enough for savings, have enough for my needs of groceries, and then try to do some fun stuff in there too.

8:35Nicole Lapin:Approximately how much is coming in? Approximately how much are you spending? Yeah. So I spend about$3 ,000 a month. That's between everything of like rent. And then I take in about$4 ,500 a month. And then where is the$1 ,500 going? Miscellaneous because I try to come up with a budget and it's very much loose numbers because I wouldn't say that I have the best discipline whenever it's like, hey, walking by a store, that looks really nice. or my energy bill was really high this month because it's really hot and all the air conditioning. And I'm like, well, thank God that I planned for that because it was triple last month.

9:24So little things like that I kind of account for. But also I have 10 % of my income going into a high yield savings account. And then I also have some student loans. So I'm paying off those about$400 a month. And then another$100 is going towards, I just started doing this,$100 towards a brokerage account and a Roth.

9:56Nicole Lapin:I love that. Wait,$100 in each? Yes. Or$100 altogether? Each, yeah. Awesome. So between the high-yield savings account, the loans, so it sounds like you have student loans. Or do you have any other kind of debt? No, just the student loans. And that payment, the 100 for the Roth, the 100 for the brokerage, you're at 1050. And so you really have like the cushion is about 450 for the energy bill, the random retail therapy, anything else that might come up. Yeah. Yeah. And you have this debt repayment plan that's pretty consistent. Do you feel like it's manageable? Yeah, I feel like it's manageable right now.

10:46I'm lucky that I don't have a high interest rate on it. I think it's about 4.9. And since it's not a really high interest rate, I'm like, I don't want to do anything outrageous of like paying it off of just doing like an outrageous amount just because it's high interest. So I feel like it's manageable. Yes. Okay. And how is the savings account and the Roth retirement nest egg going? They're going. With the high yield savings account, I really want to build this up, build up the high yield savings account. I started from zero, like I didn't have any other prior savings. So I feel like that's very slow for me where I'm like, okay, like I look at it and I'm like, okay, it hasn't moved.

11:33And I got an interest payment of 67 cents. So that's I'm like, but for me, honestly, I'm, I'm a big spender. Like anytime it hits my account, I'm just like, I want to spend this. So for me, it's honestly more or less like having a place where I can just park my money. And I know in my brain, like, I'm not touching that. Like there's nothing that comes in my way, unless it is literally an emergency, then I will touch that money. So that's the high yield savings count. The Roth and the brokerage have been a challenge. And I think I'm definitely one who learns through experiences. And this is one of them.

12:17And it's just from the start of it of like, I went into the an app and I'm like, why can't I just buy it? Like, no, you need the cash, Kate. You need the cash in the account to buy it. That's how things work. So just little things like that of just understanding. I know that I want to consistently do this. I know it's going to be trial and error, but like what to buy and like which account does it, does it need? Do I buy certain things in the brokerage versus the Roth? So little things like that I'm starting to think about more now that I know how to actually buy something.

12:58Nicole Lapin:Yeah. I mean, a lot of people, what I see happen is that they fund those accounts, but they don't actually put that money to work. So they put the$100 in the Roth, but then they leave it just in the vehicle. So the Roth doesn't actually do anything. You have to tell it what to do. It's just like a wrapper, basically, for the retirement account. And then the brokerage are the same thing. If you transfer money into that brokerage, but you don't actually tell it what to do, you haven't invested yet. That's crazy that I wouldn't, that would be the hardest thing to know about this. I've known what to do all these years, what I had to do to build my wealth and just create freedom for myself.

13:43But I never knew the more actionable parts, the buying parts, the nitty gritty stuff that do matter that I feel like it's it's a whole job within itself of just even trying to understand that kind of stuff and the fatigue that comes with it, too.

13:59Nicole Lapin:It doesn't have to be. It's like you set it up once and then you forget it. Truly. It doesn't have to be a full time job. Don't don't let that get in your head. You're doing great, by the way. And the fact that you already know those basic things are things that people twice your age don't know. So don't be hard on my new friend. How much approximately is in your high yield right now? About 700. Okay. So you've, you've only started automating, it sounds like for a couple of months. Yeah. Okay. And then for your Roth, what's in there? Like how much? Yeah, approximately. I think it's 200. This is recent to both the Roth and the brokerage.

14:46Nicole Lapin:Okay, cool. So you just started automating a couple of months ago. So you have 700 in your high yield, you have 200 in your Roth and 200 in your brokerage? Cool. Okay. I know you also had a question about retirement accounts versus brokerage accounts. Is that right? Yes. Okay, tell me. So Roth versus brokerage, I know there's different tax implications. And honestly, for me, they're meant for two different things. Like a brokerage, I think of as more like short-term, maybe fun is the word that I would use. And then Roth, I know is a hundred percent going towards my retirement and how I want to live my retirement.

15:28To me, those are very two separate things. So does that mean I invest in different products and different things? I know the time horizon is necessarily different, but I don't know how that looks or what maybe you can give an example of how that would look.

15:43Nicole Lapin:Yeah, for sure. So think of your retirement account, right, as the do not touch this until you are old and gray money, because that's the literal deal you're making with the IRS in exchange for some sweet tax benefits. So with a Roth, that money is tax free when you take it out. with a traditional IRA or a 401k, it's tax deferred. You are going to have to pay taxes when you take that money out. So that's where you want to max out contributions for stuff like index funds or target date funds, where you're playing the long game with the overall market. So ideally, you're not looking at that balance every day.

16:23Nicole Lapin:You're putting it in. You've already automated it, which is incredible. You're setting it and forgetting it. But contributions for retirement accounts should be in relatively safe stuff. In other words, does that make sense? Yeah. Yeah. And for your brokerage, you know, that's your, I love that you call it the fun money. You can't spell fund without fun. So I would think of it as your grown up freedom fund. There's no contribution limits there for a IRA. It's$7 ,500 a year right now. And by the way, it changes all the time. So make sure that you know what the max is. But for a regular brokerage account, you don't have any penalties when you pull the money out.

17:08Nicole Lapin:So you can do that at any time. But you also don't get any tax perks there. So that's your spot for money that you might need before you're 59 and a half, whether it's a down payment, if it's a big trip, or it's, you know, just extra investing once you've already stuffed your retirement accounts full for the year. Does that make sense? Yeah, yeah, yeah, that makes sense. So with, like, if you, if we were to talk about, like, my situation, would you go all in on the Roth right now before I feel like I can hit that contribution limit? Yeah, the Roth is a super powerful vehicle. So not paying tax when you take the money out is a huge, huge benefit.

17:58Nicole Lapin:And right now, I would just say, you know, you're in a lower tax bracket. Do you assume that as you go on in your career, you're going to be making more money? Yes. Awesome. Me too. My money is on you, sister. So as you make more money, you pay more taxes, right? And then generally just in the world, do you think taxes will go up or taxes will go down? Right. So if you're in the low tax bracket and taxes are potentially, who knows what ends up happening, going up, then right now you're putting in post-tax money into the Roth IRA for the privilege of taking that money out tax-free later on. And that's huge.

18:44Nicole Lapin:So with a traditional IRA or a 401k, the tax treatment is flipped. You put in money pre-tax, but you pay taxes later on. So the idea is to maximize your growth, putting money in post-tax after you've already paid taxes in a lower tax bracket, which is exactly where you are right now. And the investments within those two types of accounts don't actually have to be different. So you could do index funds, target date funds in both of them. Even for the brokerage, like being a beginner investor, I feel most comfortable doing like the index funds, even if it is more risky or if it's like in tech, for example, that maybe more risky.

19:32Some might think that. I don't know. I don't even know if it is. But for now, that feels comfortable. But then is it common over time to look at a certain stock and just go all in on that? The brokerage account, if I'm understanding correctly, is that account and is the place to do that?

19:54Nicole Lapin:I never say go all in on a single stock. It's just too risky. right and what's great about index funds or etfs is that it's a basket of a bunch of different stocks all with one purchase so if one of them goes down then you're propped up in theory by the others and so it is more risky for sure than something that's principle protected like a bond or a cd um or any sort of fixed income asset so there's equities and then there's fixed income And so equities are always going to be more risky, but the more risk, the more return you get. So that's the trade-off. So the overall stock market has yielded 7 % to 10 % over time.

20:39Nicole Lapin:And so if you're investing in index funds, they could be more risky, but compared to what exactly? more risky compared to a CD or a bond where you know you're going to get your money back. It's principle protected. You don't get your money back exactly in the same way from the stock market. But in exchange for that, there's over time been much higher reward. I don't think it matters whether it's a retirement account or a brokerage account. Generally, it's not advisable to go all in on one individual stock, regardless of the account that it's in. Okay. And I was just, I feel like I think very negatively about a brokerage compared to a Roth because of the tax implications.

21:33And I just like the idea of, you know, pay taxes now. Well, like you had said, I'm in the lower tax bracket. And it's like, all that money is my money 100%, like just to know that everything that's in the account is mine. Like there's nothing that's going to be taken from me. So is there, what are the percentages for a brokerage if I was to take money out eventually? Like what percentage is going to the IRS?

22:01Nicole Lapin:Well, you're only paying on the capital gains. So you're not, the money that you put in is yours, but the gains, because that's post-tax money, right? the gains are what's taxed. And so hopefully you're going to have a whole bunch of gains, right? And then that depends on whether they're short-term capital gains or long-term capital gains. So if you sell it before a year, which I do not advise, then you're going to pay short-term capital gains. So it's the same as your ordinary income tax bracket. If you wait past one year, then you pay long-term capital gains, which is a more favorable tax rate.

22:41Nicole Lapin:But these are high-class problems, you could go the other way, right? You could have capital losses. And so when we're thinking about capital gains, if you're holding on to something for a long period of time, those are going to be taxed at more favorable rates. But don't let the tax tail wag the investment dog. If you wouldn't buy something, if it had a different tax treatment, then I wouldn't buy it at all. This is like people talking about, you know, I should buy a home because of the tax deductions. No, can you buy a home first? The question is about the bigger purchase and then taking into account the tax benefits.

23:23It's so smart of you to take into account all of the

23:26Nicole Lapin:different tax implications here. But I would just say overall, don't let the tax tail wag the investment dog, if that makes sense. Yeah. Yeah. No, 100%. That makes sense. Don't let it dictate my entire purchase. Yeah. Especially when we're talking about big purchases and big investments here. Tax implications are really important, but it's not the whole thing. So let's dream a little bit, shall we? Let's. Let's. Let's fast forward two years and your finances are exactly where you want them. What's different? What can you do then that you can't do now? I would say my freedom of going on vacation and being able to relax while I'm on vacation, of not worrying about how much is dinner going to cost or really wanting to do the excursion while you're on the trip.

24:29but then you're like you think about the overall cost of the trip and that drags me down and feels like too much um or just going out for a nice dinner and some drinks and not feeling the guilt with that and knowing that I still have more than enough in the account for all my needs for the month and that I can still live how I want to