podcast

More Vacation Money, Right? – Matthew & Leslie Part 5

Time Stamped Show Notes

[1:04] In the first few years of Leslie and Matthew’s marriage, they had several methods to making decisions. This was mainly because every issue could not be solved by an apology, a bouquet of flowers or a group session with a CPA to talk about their finances. The couple played dominos and the best of three would win and make the decision. Some of the decisions they made using the domino system were moving the cars, grocery shopping and even changing diapers. This creative way helped settle stalemates.

This, however, does not help in solving real financial problems. Once you have a blue print or a plan on how to achieve your goals, talking about them gets easier. Voicing them and creating new ones and imagining them becomes fun. The most effective way to achieve a goal is to write it down and explicitly discuss the steps to take in order to achieve it.

[3:04] The joint goal of Leslie and Matthew is to be able to travel and enjoy time together without having to pinch pennies, buy gifts for their children and grandchildren and retire by the age of 65. Leslie thinks that Matthew might not retire at 65 because he would go crazy doing nothing. The rate of return the couple were expecting was 10% and they were willing to contribute 5% of their salary towards retirement. Matthew says that’s their overall goal towards retirement.

Leslie and Matthew’s income was re-estimated in order to figure out what was going into each account. In the case where either of them got a 2% raise in their salaries, an extra column could assist them. They will therefore be able to track how the accounts will be affected if they allocated 1% towards retirement or saving and the other 1% to increase their living expenses. In this way they will not incorporate it the right away and they won’t live off of it.

The target numbers is to get Matthew and Leslie to be able to know how much money they would need on a yearly basis during retirement. The numbers would be different by then because some of the debts like mortgage would be cleared. However, there are some expenses like insurance and taxes that would still be there.

[7:40] A very important method of saving for retirement is to live only on interest earned from the principle. The rate of return in this case therefore means what the principle would be earning each year. This would turn into the couple’s cash flow for the year during retirement. What this basically means is that the money that the principle is earning each year is what Leslie and Matthew have to live on.

A note to remember is that 401(k) money is tax deferred money meaning you don’t pay tax now but it also means if your 401(k) has $500,000 with fee and taxes upon distribution, what you really have is $300,000. One cannot therefore look at the total and use it to calculate his or her rate of return. You also have to ensure that you live a balanced life while young because the future is not guaranteed.

With Matthew and Leslie’s present value of 401(k) being 110, if they were to contribute $250 every month for 300 months at the rate of 10% then their future value would be $1,600,000. They will have achieved their green and orange goals as well as maintaining their life goals. Depending on their rate of return, if they put $500 per month then they could achieve their life imagined goals.

[11:26] Having a mix of tax deferred and not tax deferred is a good idea. An example would be if the couple have $2,000,000 in their 401(k) then what they really have is $1,000,000. If the couple have that mix and do not put all the money into tax deferred and live with having it out of their net pay then it would work out for them. It would be best if they pay their tax now while the tax rates are low and just put it into its own brokerage account. Matthew are Leslie and not currently contributing 5% of their income towards their 401(k) but they pay $4,000 annually.

[13:29] Matthew and Leslie want to achieve the orange level. Matthew believes that it is doable if he is able to keep up the same level of investment that he has been doing. Leslie on the other hand is happy that Matthew allowed her to order new coffee tables. Matthew and Leslie need to figure out how they can squirrel away money in the best method possible with the lowest fees and highest rate of return so that they can be able to achieve their goals while still maintaining the life they want to live now. It is much easier to achieve their goals if the money is in different accounts.

[15:02] Along with their goals, Matthew and Leslie have to keep in mind their inevitable expenses that come with raising their children. Children cost a lot of money and this is always at the back of parent’s minds. Leslie and Matthew have 3 children who cost them $8,000 -10,000 per child every year. This figure will rise as they grow older and they go to high school and eventually college. Leslie admits that they should be putting a percentage of their income each month towards their children’s education. Matthew says that once income comes in, it is quickly distributed out to schools and everything else they have going on and therefore they don’t necessarily put something aside for their kids. They are currently paying their children’s tuition monthly. Leslie says that they are lucky one of their daughter is in a special class because they end up paying only a fourth of the fees. While they were coding with colors, the couple placed it under color green. Both Matthew and Leslie agree that they are not taking their children out of the day schools. That is however not on their green color. It is being taken care of from the living expenses account.

[18:00] Both Matthew and Leslie are feeling good about their plan. Leslie says they are going to an event on Sunday where they will be able to splurge a little. Matthew says that they have to come to an understanding that they will do small splurges here and there but there will also be more controls.

[19:09] It is important for Matthew and Leslie to understand their money roles especially when they have a disagreement. They should see their differences as benefits. Matthew is the security seeker, wants to make sure everything is okay and he will always ensure that the family is in a stable financial situation. Leslie on the other hand, focuses on relationship, love, being in the moment, living life for today and enjoying the little things. This represents the perfect balance. Having that stability is important but also building memories and relationships is important too. Leslie says that the conversations that they now have about finances has gone a lot smoother than before. It was a great couples’ counseling for them.