Luis Barajas walks through the money basics: track what you spend, automate 15% into savings, then invest the rest once you have 3 to 6 months set aside. He covers where to park emergency funds, when stocks make sense, and why you need a power of attorney and healthcare directive, not just a will.
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Hey, everybody, this is Luis Baragas and welcome to our MyStreet Money Live today. And we've got questions coming in. I just want to share with you. I've been gone for the last two weeks. I was in Europe.
And I was in Europe. I was out in Vienna, Salzburg, just got back from Paris. Luckily, I got back from Paris before they rioted because they won the soccer or the football and came home nice and safe. And thank you for sending me some questions during the last couple weeks. And let's get started. Okay, so what do we got going here? So this is a really interesting one. This is one I get asked all the time is how do I get wealthy? How do I become rich? And so I'll go back to common sense and I'm going to break it down and give you some nuances on what everybody basically tends to say, right? It's very, very simple, right? If you want to lose weight, it's eat less, exercise more. Well, that sounds very simple, but there's a lot of stuff that you got to think about. So when you want to become wealthy or have financial independence, I call it is you want to spend less than you earn and invest the difference. So let's break that down. But spend less than you earn. Well, obviously you need to do that. But how do you do that? How do you spend less than you earn when most people are spending their entire paycheck and a lot of people are spending more than their entire paycheck. That's why you're seeing that they are in credit card debt or some kind of debt. All right, so and what's the best way to do that? All right. The very first thing is that I call it is financial self awareness. And what does that mean is that you really have to be very conscious of the way you are spending your money and what you're spending your money on. And so like I recently went through a weight loss and they said the best thing that you can do is sit down and write down or get an app and write down everything that you're eating and how many calories you're eating at every meal. And then knowing how many calories you need to lose your weight. Well, the same thing goes with your finances. You have to write down everything that you're spending money on. You're not going to be doing it forever. You're just going to do it for a short time. And so some people call that a spending plan. Other people call it a budget. I hate budgets, by the way, because nobody stays on A budget or nobody stays on a diet for a long time. But what it is, is we need you make, we need to be conscious of not what you're spending per month, but technically what you're spending for an entire year. Right? Because what you're spending per month is fine. You kind of can see that. But there's things that you're going to be spending on only twice a year. For example, if you have property taxes, right, you'll end up paying the property taxes sometimes like in, you know, in April, the other time in November, December, you're paying twice a year. So if you're just counting the months and you're not counting January, you're just only doing January, February, March, you're not going to take into account the property tax bill that you have, or you're paying your DMV fees once a year or you're paying your, I don't know, your homeowner's insurance policy twice a year. So you've got to take a look at all your spending. So do a budget. So if you actually were to go onto our website, luisbarajas.com, you're going to see what I call the confidence budget on there. You can download it for free. I think actually, to be quite honest with you, it's the best budget I have ever seen because I have worked on it for the last 25 years. I think there's nothing that we've missed and if there is something that we've missed, I would love for you to tell me. But everything's really in there and it allows you to take a look at what you're spending on a monthly basis, but also on an annual basis. And when you add it up and we're going to take a look at how much we're going to compare also how much money you're earning. Okay, so becoming self aware of how you're spending your money is the most important thing. So spend less than you earn. Now. What does that mean? Well, at the end you're going to take a look at if there's anything left to put away, any discretionary income. Well, most of the time you're not going to have anything left. That's just common sense also. So you say. So how do I do it? Well, what we're going to do is we're going to have you take a specific percentage of what you're making and have it go from your checking account into an investment account, a percentage every month. So we're going to save, let's say the goal is to save 10% of your income. So let's, you're making $1,000 a month. You're going to save, you know, 100 bucks per month on to go to an investment account or to go into a savings account. Okay, so now we're going to look at your budget and your budget says there is no $100 there to put away. We're going to take a look and it become self aware. Where can we cut, where can we save $100? What are we spending money on? You see, like you'll see the apps where they'll go into your bank accounts and take a look at everything that you're spending because you might be paying for fees that you're even not aware of or you don't even use anymore, whether you have like a lot of the.
Media fees, you know, whether you're paying Netflix or Paramount plus or Peacock. And you're probably not seeing all that stuff. And so you can stop those services. What else can you save money that, where you can save that hundred bucks a month or that 10%, you have to do it automatically. Because if you wait every single month to pay yourself first, as I say, you know, one of the other sayings is pay yourself first and cut a check after you've paid all the bills, there's nothing left. You have to pay yourself first. And what that means that you need to automate what you want to put away per month and always don't do a dollar amount, do a percentage, a percentage of what you're earning. Why? Because otherwise what's going to happen? If you're making $1,000 a week, for example, and you're putting away 100 bucks, that's, you know, that 10%. Now if you get a raise and you go to, just for the sake of easiness, you go to $1,500 a week. Now you should be putting away $150 a week into that savings plan, right? But if you had just done the dollar amount, now it's only a hundred dollars based on that 1500 bucks, it's not even 10%. It's probably like 7 or 8%. So you always want to put a percentage. Okay, so go to the website luisbarajas.com, download the financial confidence budget, work on that, automate some savings. How much should you be putting away? You know that we used to use a long time ago, 10%. Well, that 10% was great. When people were dying at the age of 58, 60, 65, the life expectancy was 67. Well, people are living a lot longer. I like to say that if you're young, start putting away 15% of everything you make towards your future, towards your financial independence. So do a minimum of 15%. Okay, all right. Spend less you earn and then invest the difference. Great, wonderful. But invested in what? Well, I go back to. We want to work on your financial foundation. You want to get your foundation strong. And the very first thing is you want to build an emergency reserve. So, okay, so when you invest money, you have to say, what am I investing my money for? Well, if you say to get rich, you have more money. Well, that's not the goal that you're going to need money. And there's a reason why. Because there's this word called liquidity, meaning that you want to be able to pull the money out if you need it for a goal that's short term and not have to pay any penalties. So if it's a short term goal, mid term goal, long term goal, it's going to depend on how we're going to invest the money. So at the beginning, when we're building our foundation, you're going to invest it in a short term goal, which is build an emergency reserve. All right. And I call it the FU fund. But you call it, you'll figure out what the FU means, but it's the emergency reserve. And how much do you need? Well, normally they'll tell you three to six months of living expenses in case something happened to you, whether you were released from your job. I mean, you got fired or you got injured or sick, you couldn't go back to work. You're going to need some emergency reserves. You kind of take a look at what's the best way to do it for them. Whether you need a one month, two month, three months. I've got some clients that we put away up to two years of emergency reserves because they've got such high profile jobs. It's going to be very difficult for them to find a job making that amount of money based on the lifestyle that they're used to. So it's up to you. I've got other clients that have maybe just half a month or a month's worth of reserve because their jobs are so steady. They just need enough to cover any kind of. If something were to happen and they had a car accident to cover the deductible on their car, something happened to their home, or, or the deductible on their home homeowner's insurance, or the deductible on their Health insurance. Okay, so put that away. So that's, that's a short term. So where do you put that? You put it into a high yield savings account, a money market account. You know, if you wanted to, you can do a short term CD where you lock in your money. It's called a certificate of deposit for six months or nine months. I don't like to go past one year when it comes to doing anything very short term when you need money for an emergency reserve. Okay, but what if you're putting money away to buy a house and your goal is that for you and your spouse or just for yourself, you want to save for a down payment and the goal is within a, you know, two, three, four, five year period, you're going to save enough money for a down payment on the purchase of the home. Well, that's going to predicate a different level of investing. Right? You can go longer out, you can still have some money in a high yield savings account, but you want to get it invested. So when you go five years or out, you want to try to invest it in equities or a well diversified portfolio. What does that mean? Basically in some stocks and some bonds or some ETFs, exchange traded funds. Again, that's when you sit down with an investment advisor and they'll help you put together a portfolio for you for that goals and long term goals. You know, if, if you're going to retire and you are 20, 30, 40, 50 years old, you still got a long time, 10, 15, 20 years left, you know you're going to have a very different strategy and then you're going to have another different strategy if you're earning a lot of money and you're paying a lot of taxes. So there's a way to minimize your taxes when it, when you start putting together a portfolio. So it's really important that you sit down with an investment advisor, someone professional who does this every single day and can guide you to make sure that you make the best decisions. So when we take a look at that common sense term, right, it's spend less and take the difference. Invest and get that money invested. There's some nuances. So again, go to the website, go to Latino Journey to financial greatness. MyStreet Money, the books. I explain all of that stuff to you there. Reach out to me as well if you need any help. Okay. Another question, this is a question, actually this question I get asked all the time because there's a lot of confusion on when people work and then they buy a home and they have a car and they have children. And they're concerned because they said, well, do I need a trust or do I need a will? And will that protect my assets? Will that protect if somebody sues me? I want to make sure that if something happens to me and I die, I can give those assets to my children. I can pass those assets onto my kids. But I want to make sure in the meantime, while I'm alive, if I get sued, that those assets are protected. Well, there's a big misunderstanding. When you are doing an estate plan, meaning creating a will, a trust, a durable power of attorney, a health care directive, nomination and guardian, none of that protects any of the assets that you're going to put property under or any assets under that you're not protected. Right. There's different ways to protect assets, but what it does is that it allows you, in case you were to pass away, to transfer those assets with the least amount of cost and the least amount of effort to your family members, to your children, without getting the state involved and having to go through a process called probate, which here, I'm in California, sometimes takes about 18 months, even longer, and the attorneys will charge you sometimes 3, 5, you know, 10% of your, your net worth and which is. Can be very, very expensive. All right? But that's not a form of asset protection. So when you are sitting down with an estate planning attorney and you have a lot of assets to protect, and you may be in an industry or, or a business, that there's a lot of potential for them to sue you, you want to ask them, what can I do to protect my assets? They're going to take you on a different, to a different conversation with the different types of trust or different ways to hold the assets. Okay, it's right here for. On the next 10 minutes. We couldn't explain that to you, but I just want to make sure that you understand that you can't do that. And then very quickly, which I've said several times before, is that just know that just right now, because I've got a lot of kids that are graduating right now, and they just turned 18, my niece just turned 18, and I just told my brother that, hey, so you have to have my niece get her own durable power of attorney healthcare directive. And the reason for that is once a kid is 18, the parents no longer actually have that kind of responsibility over them. If she were to get sick and they need to make any kind of health decisions for her, if she doesn't have a healthcare directive, naming her parents to be able to make those decisions. They won't be able to do it because she's now 18 years and old or over. Right. So make sure that.
You look at your any kids that you have or nieces or nephews and talk to their parents about that. Make them aware of that.
Couple questions on retirement we always get the same questions, but it's like, how much should I save for my retirement? How much should I save for my retirement? Well, always depends on. First of all, retirement is based on several factors. One is how old you are right now and compared to when do you want to retire? Or basically be financial independent. But when do you want to retire? So whether you're 25 years old and going to retire when you're 60 years old, you got a lot of time. If you're 50 and want to retire when you're 60, you don't have that. You have 10 years, you still have a good chunk of time. But if you're 65 and ready to retire in the next couple of years and you're going to receive your full Social Security at 67, there's not much time left. And so that's the first thing you want to do is how much time do we have left toward retirement? The second thing, as I mentioned earlier, is we need to be self aware of how much we're going to be spending in retirement. And at least I know based on all the years of experience of working with people who retire, they will spend a lot more, believe it or not, in the first five years in retirement than when they were working. Why? Because they've got the time to do all.
To do all the honeydew lists. You know, it's fixing up the house, doing the traveling, going to places you hadn't been before because you've got the time. And so there's a lot of money being spent at the beginning, but after that it starts kind of curtailing and as people get older, they don't travel as much, they've already fixed up their home. But at the beginning you do need money. So you need to have a budget and be self aware of how much money you're going to need. That's the cash flow. You need to know that. Okay. The other thing is that now something that nobody knows, it's the assumptive is you have to kind of say, well, not only am I going to know when I'm going to retire, when do I think that I'm going to die, how long am I going to need the money for? All Right. Because a lot of people, especially retirees, one of their biggest fears is that they're going to run out of money right before. Out of life. And so what happens is that they were thinking, well, you know, my family, everybody lives till about 80, 85. I just want them. I need. I'm going to retire at age 67 or 870. I need it to last 15 years. And again, people are living longer and longer. And then with all the biohacking there is right now, who knows how long people are going to live, you know, and there's a lot of. There's a lot of stuff coming out where they're. Right now, they're telling us at least that they're growing our, you know, they can grow our own livers back and hearts back in petri dishes and some kind of research lab and. And we're going to be living for a long time. I don't know if that's true or not, but all I know is that when I do a retirement plan, I usually go out to at least age 90 or 95, just in case. Right. And so now we've got to do that. So what we want to do is. You want. What I'm heading back to is we want to do a retirement plan for you, is we got to take a look at all the resources you have. Right. The other thing is, what are you going to get when you retire based on what's your Social Security or what's your pension going to be? So we need to know that. So let's just say that you're going to retire on $80,000 a year. All right? And so we know that when you retire, you're going to get $40,000 a year from Social Security or $30,000 a year from Social Security. We got $50,000 to make up. So we've got to take a look at how much we currently have right now in our 401 and our simple plans, our set plans, whatever retirement plans, and then take a look at and put it into a retirement calculator and see that if we earn a specific rate of return, how much income we're going to get to be able to live off of, basically, and divide that by 12 and live off of it monthly and with our Social Security and see if that's going to be enough. So there's a lot of work that goes behind a retirement plan. I know that I spend literally sometimes an entire week just doing a retirement plan for one client, because we've got to go and take a look at their properties, their pensions, Social Security, what they have in different retirement plans. One of the things that I like to do as people get older, I like to simplify as well. The problem that I have is that a lot of people will have when they're in their 50s and 60s, they have accounts open at credit unions, bank accounts, all sorts of different bank accounts. And that's when I start basically consolidating everything. Just makes it a lot easier to take a look at everything all in one place. Okay, so how much do you need again? It depends. It depends on your age. It depends on how much cash flow. But I will say you can never not save enough. And I'm always a believer that since we don't know when we're going to die. Right. I've never seen a U Haul behind a hearse. We're not going to take anything with us. I love for our clients to spend money as well, pre retirement when they're young and they're healthy and they can travel and they can experience life and at the same time balance that out with savings for the future. Okay, so sorry, couldn't answer. Give you the specific answer. But as I just wanted to share with you all. All the things that really go into a retirement plan and what it requires, so you just don't take it so lightly so you can sit down and do it yourself. A lot of great retirement calculators. There are a lot of great financial planners that can help you with that as well.
So look online Vanguard, I think, has some great retirement calculators. All right, let's see here. What else do we've got? What else do we've got? I think that was. There wasn't a lot of questions.
Here's the one. Okay, so how do I change years of financial habits without feeling ashamed? All right, how do I change years of financial habits without feeling ashamed?
