"I Just Got a Raise. What's The Best Thing To Do With This New Money?"
The Money Rehab podcast delves into the optimal way to allocate a caller's substantial pay raise. With a robust financial foundation—significant savings, investments, and retirement funds—the caller seeks guidance on maximizing the additional income.
Nicole Lapin, the host, advises the caller to avoid lifestyle inflation and structure their savings effectively. Strategies include establishing an emergency fund, contributing to college savings plans, and exploring high-yield savings accounts and short-term investments. Lapin's recommendations aim to help the caller make the most of their increased earnings while maintaining financial stability and investing in their future.
This is a preview of the Shortform summary of the Aug 29, 2024 episode of the Money Rehab with Nicole Lapin
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1-Page Summary
The Caller's Favorable Financial Position
The caller has benefited from a recent 40% pay raise along with reduced childcare expenses, as their child starts primary school. Their strong financial foundation includes:
- $50K in savings
- $150K in stocks, including a major tech company
- A multi-million dollar retirement portfolio managed by a financial planner
- Over $100K in old 401(k) accounts consolidated from previous jobs
Overall, the caller has a considerable net worth with minimal debt besides a $15K car loan, allowing for a comfortable lifestyle.
Optimizing the Additional Income
Nicole Lapin, the host, advises that the caller avoid lifestyle creep and structure their savings effectively. Key strategies include:
- Opening a high-yield savings account, like Publix's 5.1% APY account, through direct deposit transfers
- Exploring short-term treasuries and high-interest options, as suggested by Lapin, including using the Public app for dual savings/treasury functionality
- Finding an investment earning higher returns than the 6% car loan interest rate
Allocation Recommendations
Emergency Fund
Lapin recommends establishing a $20K emergency fund in a high-yield savings account for unexpected expenses.
College Savings
Automatic $500 monthly transfers ($250 per child) are advised for existing 529 college savings plans.
Short-Term Investments
Investing in short-term treasuries or CDs through brokers like Public is suggested to earn higher yields than basic savings accounts while keeping funds accessible.
1-Page Summary
Additional Materials
Clarifications
- Lifestyle creep, also known as lifestyle inflation, is the tendency for expenses to increase as income rises. It occurs when people start spending more as they earn more, often leading to a higher standard of living that may not align with actual needs. This phenomenon can make it challenging to save money or invest wisely, as spending habits adjust to match or exceed increases in income. Lifestyle creep can be subtle and gradual, making it important for individuals to be mindful of their spending habits to maintain financial stability.
- A 529 college savings plan is a tax-advantaged investment account designed to save for future education expenses. These plans are sponsored by states, state agencies, or educational institutions and offer various investment options. Contributions to a 529 plan grow tax-free, and withdrawals for qualified education expenses are also tax-free. Each state's 529 plan may have different features, investment options, and benefits, so it's essential to research and compare plans to find the best fit for your financial goals.
- Short-term treasuries are short-duration government securities issued by the U.S. Department of the Treasury. They typically mature in one year or less, making them relatively low-risk investments. Investors buy these treasuries to preserve capital and earn a modest return over a short period. Short-term treasuries are often used as a safe haven for funds that need to be easily accessible or as a way to diversify investment portfolios.
Counterarguments
- The recommendation to avoid lifestyle creep, while generally sound, may not account for the caller's personal values or desires for using their increased income.
- A $20K emergency fund might be too conservative or excessive depending on the caller's monthly expenses, job security, and personal comfort with risk.
- The advice to find investments with higher returns than the 6% car loan interest rate doesn't consider the risk profile of such investments; higher returns typically come with higher risk.
- The suggestion to use high-yield savings accounts and short-term treasuries assumes that interest rates will remain favorable, which may not be the case in a changing economic environment.
- Automatic $500 monthly transfers to a 529 plan may not be the most tax-efficient strategy for college savings depending on the caller's state tax laws and the potential for scholarships or changes in educational plans.
- Investing in short-term treasuries or CDs through a specific broker like Public may not be the best option if there are lower-cost or more diversified platforms available.
- The advice does not consider the potential benefits of paying off the $15K car loan early, which could be a guaranteed return on investment equal to the loan's interest rate.
- The strategies provided do not address the possibility of the caller having other financial goals or obligations that could take precedence over the suggested allocations.
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The caller's financial background and current situation
The caller shares details of a strong financial background and a favorable current situation, marked by a recent job change and evolving family expenses.
The caller recently received a 40% raise at a new job, and is also saving on childcare costs as one child starts primary school.
The caller has experienced a significant increase in income due to starting a new job that came with a 40% raise from a previous $120,000 salary, and with their child beginning primary school, they're saving approximately $1,500 per month on daycare costs. The caller has a partner, and they manage household expenses that approximately add up to $6-7K per month.
The caller has a significant amount of savings and investments, including $50K in a basic savings account, $150K in a public company stock, and a multi-million dollar retirement portfolio managed by a financial planner.
Their financial resources are considerable, including $50,000 in a savings account and stocks in a major tech company—referred to as "fangs"—valued between $150,000 and $200,000. Additionally, they have a retirement portfolio that is worth a couple of million dollars, managed by a professional at Morgan Stanley. On top of this, the caller found an old 401(k) from their first job with $25,000-$30,000, which they had been contributing to unknowingly, other 401(k) accounts from various jobs that were consolidated, and most recently a 401(k) with about $75,000 rolled over from their last job.
The caller's net worth includes a lump sum of $60K from a previous job, as well as several old 401(k) accounts that had accumulated over $100K.
The caller received a lump sum of about $60,000 after taxes from a previous job. Furthermore, the consolidated funds from various 401( ...
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The caller's financial background and current situation
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Clarifications
- A retirement portfolio is a collection of financial assets, like stocks and bonds, specifically earmarked for retirement. It is managed by a financial planner at Morgan Stanley, a well-known financial services firm that offers investment management services. The term "couple of million dollars" indicates that the total value of the investments in the retirement portfolio is in the range of two million dollars. This portfolio is designed to grow over time to provide financial security during the caller's retirement years.
- The caller's net worth includes a lump sum of $60,000 from a previous job. This lump sum represents a one-time payment received from their former employer, typically after taxes have been deducted. It is a significant amount that contributes to the caller's overall financial standing and assets.
- Consolidating funds from various 401(k) accounts involves combining multiple retirement accounts into a single account for easier management and potentially better investment choices. This process typically simplifies tracking retirement savings and may reduce administrative fees associated with maintaining multiple accounts. By consolidating, individuals can have a clearer overview of their retirement savings and potentially optimize their investment strategies. It is a common practice for indivi ...
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Strategies for managing and investing the caller's additional income
The caller wants to ensure that their fortune does not lead to lifestyle creep and expresses interest in structured saving and investing strategies. There are several viable options to consider that will allow the caller to live within their means while optimizing the extra income they now have.
Avoiding Lifestyle Creep and Building Savings
The caller is determined to avoid lifestyle creep and is looking for a structure to manage additional income effectively. It’s critical for them to find a savings or investment strategy that secures their additional funds without succumbing to the temptation to upgrade their lifestyle drastically.
Structured Savings over Low-Yield Accounts
The caller has recognized that their current savings account, with an annual percentage yield (APY) of 0.02%, is not the most productive way to save their additional income. Nicole Lapin, the host, suggests that the caller consider high-yield savings accounts or short-term treasuries, which are currently offering substantial interest rates.
Exploring Investment Options
The caller is open to exploring various investment options with the purpose of saving for long-term goals such as purchasing a home or boosting their children’s college savings.
Opening a High-Yield Savings Account
Lapin advises the caller to set up direct deposits to move money from the existing low-interest account into a high-yield savings account. She emphasizes that this move is a simple and effective way to grow one's money, calling it a "no-brainer" in comparison to sticking with the current low-yield account. Specifically, she mentions the Publix high-yield savings account, which boasts an impressive 5.1% APY.
Considering Short-term Treasuri ...
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Strategies for managing and investing the caller's additional income
Additional Materials
Counterarguments
- High-yield savings accounts, while offering better interest rates than traditional savings accounts, may come with certain restrictions or requirements that could be inconvenient for some users.
- The 5.1% APY offered by the Publix high-yield savings account may not be guaranteed long-term, as interest rates can fluctuate with economic changes.
- Short-term treasuries, while generally safe, may not offer the best return on investment compared to other options like stocks or real estate, especially in a rising interest rate environment.
- Direct deposits into a high-yield savings account are a good strategy, but they do not diversify the caller's investments, which is a key principle of risk management.
- While the Public app may offer convenience, it's important to consider the fees and the financial stability of the app provider before committing significant funds.
- Seeking investments with returns higher than the 6% car loan interest rate might lead to riskier investments, which could jeopardize the caller's financial stability if not carefully managed.
- The advice to look for the highest interest rate possible in a high-yield savings account may not take into account other factors such as customer service, ease of access to funds, and the reput ...
Actionables
- Automate your savings with a twist by setting up a 'savings ladder' where each month a portion of your income escalates incrementally into your savings, starting with a comfortable percentage and increasing by 1% each month. This helps you gradually adjust to saving more without feeling the pinch all at once.
- Create a 'goal-matching' fund by opening multiple sub-accounts within your savings account, each labeled with a specific goal, such as "Home Down Payment" or "Kids' College Fund." Allocate a percentage of your income to each based on their importance and timeline, which can psychologically reinforce the purpose behind your savings and deter you from dipping into these funds for other expenses.
- Engage in a 'savings sprint' chal ...
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Specific recommendations for allocating the extra income
As the host advises on how best to allocate surplus income, several financial strategies are recommended for the caller to optimize their financial security and future planning for their children’s education.
Establish an emergency fund of around $20K in a high-yield savings account, to provide a buffer for unexpected expenses.
The caller is encouraged to earmark $20,000 for an emergency fund in a high-yield savings account, as having around $40,000 in something accessible and easily liquidated is ideal for emergencies such as illness or job loss. The host acknowledges the caller may already have other liquid assets, but reiterates that a $20K emergency fund might be sufficient, freeing the rest of the funds to be directed towards other financial objectives.
Set up automatic monthly transfers of $500 ($250 per child) to contribute to the children's existing 529 college savings plans.
Consistency in saving for children’s education is key; therefore, the caller agrees to set aside $500 for each 529 plan, totaling $1,000 each month. The host suggests that an automatic transfer of $500 be set up from the new paycheck to the 529 plans, ensuring regular contributions to the accounts, which were previously funded sporadically.
Explore investing some of the additional income in short-term treasuries or CDs to earn a higher yield ...
Here’s what you’ll find in our full summary
Specific recommendations for allocating the extra income
Additional Materials
Counterarguments
- The recommended $20K emergency fund may not be sufficient for all individuals, as the appropriate size of an emergency fund can vary based on personal circumstances, cost of living, and job security.
- Allocating $40,000 for emergencies might be excessive for some people, especially if they have other financial priorities or debts with high interest rates that could be paid off instead.
- Automatic monthly transfers of $500 to children's 529 plans may not be the best approach for everyone, as it assumes the caller's financial situation will remain stable and does not account for potential changes in income or expenses.
- Investing in short-term treasuries or CDs assumes that the interest rates will remain favorable, but rates can fluctuate, and there may be better investment opportunities available that align more closely with ...
Actionables
- You can diversify your emergency fund by exploring peer-to-peer lending platforms for potentially higher returns while maintaining a portion of your fund in easily accessible accounts. By investing a small percentage of your emergency fund in peer-to-peer lending, you're able to potentially earn higher interest rates. Just ensure you understand the risks and start with a small amount to maintain the liquidity of your overall emergency savings.
- Consider setting up a dedicated savings challenge with friends or family to reach your $20K goal faster. Create a group where each member commits to saving a certain amount monthly, and then share progress and tips. This can turn saving into a more social and motivating experience, potentially accelerating your ability to build up your emergency fund.
- Look into a ...
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