How to Use Your Budget Now to Meet Your Future Financial Goals

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3:15You have more than one financial goal. How do I know that? Because we all do. The trick is, how do you work toward multiple goals at once? The answer isn't some money move that your future self will need to make. The answer lies within the money moves you're making right now. And I'll show you how to make one of those money moves with the help of Bank of America, whom I partnered with for this episode. First, you'll meet someone who's debating this question right now, a money rehabber named Sarah. She already has some real estate investments, but she's thinking about buying another house in a few years.

3:45Plus, her husband wants to retire early. So how does she balance these two goals? The answer is not waiting around until she's ready to buy a house or until the eve of her husband's wannabe retirement date. She has to put in the work now. She needs to know how much she can save for these future goals and then start saving. So in this conversation, we do a deep dive into her finances so we can figure out that number together. But like most things in finance, these long-term goals are deeply tied to emotion. So in this conversation, too, you'll hear about how watching her family go through the 2008 crisis has affected Sarah's thinking and how she takes a step toward overcoming that trauma in this very conversation.

4:22Whatever goals you're working toward, long-term or short-term, Bank of America Corporation has the tools to help get you there at bfa.com slash financial next steps. But for now, let's get into it with Sarah. Sarah, welcome to Money Rehab. Hi, thanks for having me. I'm so excited to be here. So you want to buy a house in two years. You found yourself in a little bit, it sounds like, of a Goldilocks house situation. Can you tell me about what's going on? Sure. So it's a little convoluted. So back in like 2016, fresh out of college, got my first big girl adult job. All my goals was to just buy a house instead of constantly moving apartments every couple of years.

4:59So little saving scrapping, bought a cute little townhome where I lived, very, very 80s. And my family's in the kind of fix and flip construction world. So bought it with a little help from my parents. And then we spent about four years gradually renovating it. Nothing major, like new tile in the shower, new cabinets in the kitchen, very minor, some new paint, better light fixtures type of thing. And then I got married and my husband moved into that house with me. And then once COVID hit with the interest rates being super low, when we're both like living at home and thousand square feet was not quite enough for us anymore.

5:31So we wanted a bigger house and we were unsure of like where our life was. Like we're newly married, unsure of like, do we want kids? We want to live a little bigger. And then we found this huge master plan community that was being built outside of the city. And we're like, well, we can go there because it was great deals on houses. We had like a couple of floor plans. And with interest rates being so low, we just kind of like took advantage of that. cashed out a heloc on my first property rented it out moved there lived in that for about three years it had an unfinished basement so then we renovated that so we turned this three-bedroom house into a four-bedroom house for two people so it seems like too much house the two of us but then he got a job opportunity that then picked us up and moved us out to california where we're currently living and we're renting out both our houses and we're still in this weird limbo of like we want we want to move back and we'll eventually just move back into one of our current houses first but we're like one's a little too small one seems a little too big and so we're trying to like maybe we'll just buy another house in a couple of years when interest rates come down a little bit more and just have like our own mini like housing real estate empire is like our new joke of like where's gonna be those people and we can retire him early and he cannot manage them we can just kind of live off of those instead of having to deal with the uncertainty of the stock market for our retirement or have it supplement our retirement in 20 years time when those mortgages are paid off as kind of where we're sitting but it's now it's like how do we figure out saving for a house because he doesn't want to do the heloc thing again like that still terrifies him of like why what happened nothing he just didn't like he didn't like the idea of having debt like he was brought up in those like cash only houses so i had to teach him we got married like here's how credit scores work here's how to get a credit card like i had to help buffer him along and so is he first generation american nope he's been here his whole life his dad was just like some old account of this just the way he was just brought up as like cash only which was great we first met like he was great at savings bought his first car for like eight thousand dollars when he was 21 years old type thing so it's a really big hook for me it's like oh he's great at savings i didn't know how to do that at the time so that was a good hook but he just had no idea how credit works and he just hates the idea of getting into debt i'm like but you can use this money to your advantage but since we still have our heloc for my first home and we're paying that off on top of having two mortgages but all that money comes out of a rental income so it's not our actual cash out a pocket.

7:40He doesn't want to either extend another loan or he's just worried about being dead eyeballs. The 2008 recession type thing, I think, caught his family off guard as well. I think he just has this fear of being in over his head at the same time. But he's not saying buy the house in cash, right? No. With our big house, we managed to do a 20 % down payment because he found out about private mortgage insurance. And he's like, that's a scam. I don't want to deal with that. But the reality of the market is we probably won't be able to do that again, putting that much down in the house and so that's his other big issue is like we spend too much time on zillow looking at houses and playing around with the numbers it's back like oh we could buy this right now and i'm like do we really want to buy that i need to renovate this like we he just went full bore from being like you buy the one family home to pick a fence and now i'm just like we're renovating we converted his way of thinking with my family's weird it's the money you play with it and this and we fix it up and now he's gone full down that rabbit hole when we first met he was totally against the idea of painting a house is too much work type.

8:42Yeah, it's like he was against it. Now he's like all for this one equity type thing. I don't know. So you guys have renters in both of the houses you own. Correct. Has it been hard to find renters? No, we've been pretty fortunate where my little townhome is. It's a college town. So there's a lot of influx of like young students. And we've been fortunate because both my mortgages are so low that we can actually rent under the market. So we can be a little bit more choosy with our tenants. And also not have someone feel strapped for cash, which makes me feel better knowing that like with life uncertainties is like I don't have someone like missing their rent either.

9:16So we were playing a little short with the numbers, but I feel better knowing like someone's in there, the bills are getting paid. I get a little extra in my pocket to cover in case something breaks. And we call that good versus gouging out the market on that. So it's always been pretty good where other houses is a huge oil and gas industry out there. So a lot of people are moving in and out with the influx of that. and it's just a lot of like the hospitals are nearby being built and those kind of things so we've got a good pool to cover both ends of the market like we have like right now our current one tenants like a college student working on like her doctorate degree and it's a family of like four i think and the husband works in the oil and gas industry and the wife's a teacher and they seem pretty happy with staying so far so i'm like i have no problem with keeping them on as long as they want to stay what are your interest rates you said they were really low so for big house We bought it right at the end, like September of 2020.

10:05So we were just under that. I think we're like right at that 2%, 2.5 % mark. And then my townhome, I refinanced a couple of times when I first bought it. It was just like, I just wanted to buy a house. So I had an adjustable rate. So then we refinanced and then we refinanced again for the HELOC on it. I think that's at like 3.2%. Okay. Well, sadly, the go-go days of those low interest rates are over. It is kind of like a double-edged sword though. getting a good interest rate is obviously awesome, but then you end up chasing that high whenever you dip your toe back into the market, which it sounds like is what's going on with you guys.

10:40And as we know, interest rates are coming down, but experts think it would probably take another pandemic, which we would not want for interest rates to go that close to zero again. They were just so unnaturally low for so long that we got used to it. And weaning off as you have been going through is really hard to do. So for this husband on that one is like 4 % of greatest rate, 5 % is great. He just won't take it. I'm like, no, you're going to accept that if we're going to buy again, like 5 % is like the back to the 80s of 20%. The next property that you want to buy in two years, what's your goal with that property to live in it for a while to flip it, use it as investment?

11:24I think it'd be more of like a live-in long time. I'm a little over moving. I was doing the math and we've moved four times in about four years. And I'm just like a little sick of that. We figure if we move back to Colorado, we'd probably go back to one of our houses if leasing timing works up. So we can just sit and we can like spend six months and like hunker down and figure out our budget and then find another, probably another townhouse actually. like less upkeep of like the maintenance and the landscaping because we're not outdoorsy people which was a big learning curve with the first house in the suburbs my husband realized that he wanted a big yard for that stereotype and he realized he hated mowing the lawn I'm like yeah and I refused to do it too and I told him from the jump that I didn't want to mow a yard so we might go more a townhome type route again just for simplicity's sake I think it'd be more of like a permanent permanent home we can live in under under our means and then be that retirement homes.

12:17We can just live off of our incomes when the other two mortgages get paid off down the road. Okay. So something you can live in that doesn't have a yard that needs to be mowed. Got it. So that's going to help us look at this house school against your entire financial picture. We got some of your details in advance. Thank you for sharing because we want to dig into it. Let's talk about income, expenses, and debt. Start with debt because that's, you know, not the most fun. So let's just get it over with. You have$128 ,000 left on your mortgage on your townhouse, $285 ,000 on the other house,$20K in student loans, and that$35 ,000 HELOC or home equity line of credit balance.

13:03Am I right so far? Yep. So that, Sarah, is$468 ,000 in debt. Again, this isn't bad debt. Mortgages can be considered good debt, but that's in the liabilities part of your assets, liabilities, net worth chart. And then your monthly expenses. I'm going to list those out. Rent,$2 ,900. Mortgage on your townhouse,$867. And the HO fees are$266. the mortgage on the bigger house is 1871 your hoa fees are 25 that's pretty low yeah it's just the trash they do it they bill it annually so i just like did the math and like it's like 300 for the year and it just covers trash pickup as always i was like maybe you're missing a zero but no okay cool life insurance is 53 and 37 bucks monthly groceries is 150 a week so that's 600 bucks a month.

13:59You said gas is around$110 a month. And for the fun stuff, you said you're between$200 and$300 a month. Let's work with the bigger number, have a little more fun, and call it$300 a month. Does that sound right? So you have a total of$7 ,030 a month going out in expenses. Let's talk about what's coming in so we can see the entire picture. You and your husband make $110K pre-tax, but you're also renting out the two properties you own. And the rent you're earning is more than your mortgage payment, which is great. So you're both making a profit there. You said you're net making$1 ,200 a month from both properties.

14:41So let's add$1 ,440 to your annual income and say you make$124 ,400 pre-tax. You live in California, like I do, so your state taxes are probably very high. But putting state taxes aside and just thinking about federal taxes, your take-home pay is probably closer to$95K, perhaps more depending on what you're writing off. So$95K a year is$7 ,900 approximately a month. And we said that your burn rate is about $7K a month, which leaves you about$880 a month. And that's not counting your debt repayment for your HELOC or your student loans. But would you say after expenses, you're probably keeping around 800 bucks a month?

15:25Yeah, I actually think that sounds higher than what I have been like seeing put in this. If anything left or just goes to the savings, I think we're putting less in the savings. So that seems a really good number. Well, let's talk about those savings. So you have$19 ,500 in a savings account. You also have retirement savings. You told us that you have$44 ,000 in your IRA and you're not sure about what's in your husband. So maybe we're going to want to check on that, but you think it's probably near$20 ,000. So that's$64 ,000 approximately. When do you think you'll retire? How old are you guys now?

16:01I am 34 and he's 33. But you mentioned your husband might want to retire in 20 years. Is that right? Yes. Yeah. So he's in the beer industry, which is just very physically domain on his body like one of our like joking things is if I can make over 85k a year myself he can retire and be like a house husband like that's one of our low-key kind of fun plans because he's just this job to ever like he loves the industry he loves brewing he enjoys doing it but it's just so hard on his body and I'd rather have him functioning for longer as just like a healthy adult so like we can retire him early or he can do something more like a part-time time earlier on in life.

16:39And then we can stay home and take care of me because he's in like the baking and cooking and like all that stuff. So I'm like, I have no problem working. Yeah, I'm so spoiled. It's great. Love that for you. Okay. I mean, I'm really going to zero in on the retirement part of your overall picture, because I think it's important to look at how that big purchase would affect what that retirement plan is, especially since you want it to be accelerated compared to what people typically think is a retirement age. Is that fair? For sure. So putting real estate aside, let's say you're keeping about 800 bucks of your paycheck per month and you put that toward retirement savings.

17:15Now, for most people, their burn rate in retirement is much lower than when they're working. The fact that you own your property means that you have minimal housing expenses when you're retired. And of course, that would bring down your burn rate dramatically. Or I don't know, maybe you guys want to live in a Four Seasons-esque retirement community when you're older. That's something you maybe need to get on the same page about. And it's an important thing to consider, especially an important thing to talk about with your husband, getting really clear about what you both envisioned for those retirement years.

17:40Is that something you've started discussing? We have. We kind of go back and forth on like what it could be. Like he has some family property that he's supposed to inherit. He's going to share with his brother in like, sounds more, but like honestly, in like 10, 15 years, he'll come into another house himself that him and his brother will share ownership of. And then my family extended for me is like an LLC where we have seven or eight rental properties that my dad manages along with realist other like franchise investments and stock markets that my siblings and I will also inherit from them. So I know down the line that will also increase and grow as well.

18:17So it's hard to like really come up with a hard and fast number knowing we both have like other assets that we will end up inheriting in down the road as well. So I have a hard time being like, oh yeah, we just need our 401ks to hire. I know I have other stuff coming in that could be up to like the million dollar plus range to pay on how inflation shakes out in like 20 years time. That sounds awesome. I love the million dollar windfall. I would say it's important, though, to start planning, assuming that that's not going to happen. Yeah, which is the hard part of like I have other weird things like I don't know what it's going to look like.

18:51I think the biggest thing is like our worst case scenario is like life gets hard. We move back into my little townhome because it is so small and it is so cheap. and we're doing that by weekly payments on both our houses. So we know the mortgages are going to get paid off in less than their 30-year fixed loans, which is another thing of like, we're hoping in like 25 years or once my student loans get paid off, take that extra cash and throw that into the mortgages more too to help pay them down. So the sooner those are cash flowing, we can live off of those incomes is our 15-year, 20-year plan for sure is to start getting to that point regardless of what our jobs are.

19:24I mean, yeah. And you don't know what's coming and we hope that you get all the windfalls, but God forbid, maybe that doesn't happen. Maybe something else happens. I would kind of view it as a nice to have, not a need to have, and then operate your own plan independently. So if it happens, it's great, but you're not relying on that. Okay. So I want to double click really quickly on something that you mentioned that you don't know how much your husband has saved for retirement. Are you guys really talking about money? Are you getting granular with each other? We are. I actually asked him like a week ago, like he knew what his 401k was.

20:02And he said he guessed this. And I'm like, oh, you should look into it. He's like, I will. And he just hasn't. Okay. So it's not a symptom of you guys not talking about money. You do. Yeah. No, I have a lot of anxiety around money. I turn my account all times a day to make sure there's no like surprise expenses and things like that, which he gets annoyed by because he can't surprise buy me things even if we're very cheap because I will see it within like the day or get notifications on our cell phone so like I'm very much like how much we're spending and I'll recalibrate do our budget like every three months being like we need to save up more because we want to take a trip to Europe so I'm like okay we got to reassess all our spendings we can save more so we can do that or Christmas is coming so we're saving money to buy all our extended family gifts and like I constantly am recalibrating our budget based on short-term goals I just have a hard time doing the longer term thinking that far ahead, like what retirement will look like, because I can't decide what I want to do.

20:51Do I want to live in my little house or do I want to live in like those really fancy, like, you know, four seasons retirement communities where you just show up in a little apartment and they have a buffet that they feed you and all the activities. Like I go back and forth on that myself. That makes sense. And I'm glad you're driving those short term conversations, but we're going to think about the long term together. And so the good news, Sarah, is that from my perspective, you have a lot of options here. I would just consider the fact that the golden rule of finance is diversification. And right now you're pretty concentrated in real estate.

21:23You know what I mean? I guess I am. I didn't really think of it that way, but we kind of, we kind of are compared to like my little, what is it? My brokerage account and my IRA and stuff like that. I don't think of that because I feel like it's just always there, but yeah, that old, old fashioned thing about all your minds in real estate. I'm like, no, all our money's in real estate. But at least, you know, one of them could be a quick sale. I'm just against the idea of selling them. Like, I'm emotionally attached to my first house. And I will never, like, I told him, I don't care what else we do, but I'm never selling that.

21:49And he's like, we could just sell it super quick. I'm like, I know we could in almost more than double what I paid for it type thing. Listen, finances are emotional. I'm emotionally attached to that. I won't give it up. But yeah, I mean, it's definitely emotional. Definitely makes sense that it's anxiety provoking. It happens to a lot of people. But, you know, selling a stock is probably not as emotional as buying a house if you need the money. So let's talk about ways you could diversify some of your investments since you've already decided that you really want to buy a house, another house. Have you heard of a 2-1 buy-down?

22:21I have not. So this is something for your husband when he is missing the 2020 interest rates. This is a way to basically get the seller to give you a credit that effectively subsidizes your mortgage for the first two years of your home. So in a 2-1 buy-down, it's standard for the seller to give you a credit that covers two percentage points off the first year of your mortgage and then one percentage point off the second year of your mortgage. So if your interest rate, let's just say, is 6.5%, it would be 4.5 % in the first year and then 5.5 % in the second year. So then the 6.5 % would only fully kick in in the third year.

23:00So it's important to remember that the interest rate is temporary unless you finance, but it is another option for you. okay yeah I've been kind of seeing different things online about like if someone bought their house I think it's like an FHA versus conventional thing of like they bought their house during COVID you can kind of assume the loan under those lower interest rates I've seen mixed reviews on like that or versus and there's stuff about like if you have a good credit score you're gonna have to pay more points to get better interest rate I'm like how much is that real versus fake and I just kind of want to like prepare myself for that kind of stuff too especially the conventional versus FHA stocks.

23:33I know if we do the townhome round, there are rules around owner occupancy versus tenant occupancy, which can prevent you from getting one of those loans. I want to say I think it prevents the FHA loan for a townhome like complex and stuff like that too. You wouldn't be a first time. FHA loans would be for first time homebuyers. Okay. I wasn't sure. I couldn't remember. Well, no, the assumable mortgages, you know, those are often for VA loans or, you know, assumable loans that you would take on the interest rate, which is great. But you also have to take care of what they've paid into the mortgage.

24:10So you might have to fork over a bunch of cash. But there are definitely options, and I'm glad you're considering them. The second thing I'd consider is tweaking your spending plan so that you can be saving more money over the next two years for that down payment. With your HELOC and your student debt and your two mortgages, if I were you, I feel like that's a lot to juggle. So I'd probably try to make my next down payment through savings rather than with the debt. I'm sort of with your husband on this one. That's just me. That makes me more comfortable. yeah the big thing is like I think I originally had a plan to have a student loan should have been gone by next year like I had a whole plan but between COVID and buying a house I procrastinated them and actually last summer I was laid off and I just got back into the workforce full-time myself a couple months ago so we the whole like repayment plans changed I'm like there's been no interest on them for the last few years but I don't feel many payments on them either but for For the most part, our rental income covers both our HELOC payments and my student loan payments.

25:12So I've been trying to hit those a lot harder now that I'm back employed and we didn't need to actually live off of our rental income for the past eight months or so, which has been nice. Okay. I mean, what I would recommend as your house hunting is doing an exercise with your husband where you can sit down and make a V1 retirement plan. it's v1 so you're not signing a contract you can always make changes but it's always easier to edit than to write right um so just have something that could be your map for retirement just put something down so we could start planning for that and of course there are going to be detours and life and you know what else happens all the time so it can and will change but having something down gives you more direction than what you have right now so what i would do is think about what your burn rate would be in retirement, which also involves deciding whether you want to live in one of your properties that you own, or if you want to live in the Four Seasons or wherever.

26:11And then once you have your burn rate, you're going to have to do something that feels uncomfortable, which is multiply that by how many years you think you'll be in retirement, aka how long you think you're going to live. You'll also want to consider the potential for inflation and increased health care or long-term care to actively prepare for what you might need down the road. You know, it feels really ick and uncomfortable, but this is an exercise that just avoids the situation where you run out of money in retirement. Is that something that sounds feasible? It sounds feasible. I kind of talk about that a lot of just because we have older families.

26:46I'm already like, how do we avoid taxes in real estate, all that stuff? And he gets really creeped out. I'm like, no, we got to figure out living trust now. Like talk to your dad of making sure we don't get settled with taxes when he passes away because he's not doing well. And I got grandparents. I'm like, they own a business. It's like, my dad's siblings are going to assume this business when they pass away. And like, we start talking about this. Like my family is very medical. So we're like, yeah, we talk about death, like on the regular and injuries and it just grosses him out. But I'm like, no, we got to start thinking about this for ourselves now too.

27:13And he just gets very, very clean. It's like, well, it's like, you know, you don't talk about these things in flight company. I'm like, but we have to talk about them. So it's always me trying to like push those conversations up until he like, it's just breaking point and has to walk away. Hmm. I mean, it makes sense. They're uncomfortable conversations. I'm surprised that he feels queasy about them considering, you know, where he's coming from around debt. I think that having a revocable living trust in order, you know, helps prevent you from going through probate, which, you know, is, is probably what you're saying to him.