If You Don't Follow This Financial Advice, It Could Cost You MILLIONS!

not listening to this advice could cost you millions it's brian preston the money guy yeah brian this is going to be an exciting one uh because they're all very very exciting ones and this is what i think is interesting you know we've been managing money being financial advisors helping people with their finances which is wonderful we get to see people dream of goals they want to achieve our life accomplishments and watch them happen but one of the other things we get to see is when people maybe get things out of whack and maybe go in the wrong direction and maybe do the things that are less than optimal so i feel like we have just a huge uh library of knowledge of what not to do and we're going to share some of those on today's show i'm shocked because we spent so much time in pre-show planning trying to make sure we got the verbiage right on close to four decades close to four decades of experience that we share by the way i'm the anchor for that on the old one here so i think that i carry a lot of that one adding some so it's um but we did we did look at that and i think it is interesting because what i have just love about our profession is that i can show people you take the same dollars out of your wallet out of your purse but how you use them will end up with two distinct different paths and and there is a better way to do it and this is one of those things if you have not done it i want you to go to moneyguy.com resources we have all kind of free information on there for you to download and one of the big ones that we've been perfecting really for the last five years so we've been working on this has kind of been as we fine-tuned it with you guys as part of the money guy family and is the the nine steps of the financial order of operations so go download the free you know pdf deliverable that we have on this and it's going to walk you through because this is exactly what we want to cover is if you screw up the free stuff i mean the steps here of foo it can completely take you in a direction you don't want to be and i think what i think is so interesting when i see folks getting getting stuff out of whack or making wrong financial decisions the big ones are pretty obvious like oh if you go rack up credit card debt or oh if you go spend more money than you make like those are pretty obvious what i think is interesting about getting these steps out of order is sometimes you're making big mistakes that are costly and you don't recognize it or or even more so you think that you're actually doing the right thing oh i'm making a good decision to do this thing not realizing what the true opportunity cost of that decision is so we broke this into five case studies yep and we did our deep dive treatment where we actually show you numbers because i think that's the thing sometimes you get the concept but nobody is ever actually showing you the numbers so the first one i think this is so important because look there are a lot of people that are doing podcasts there are a lot of people doing youtube channels and it's easy for you to go gravitate to a personality because you like their presentation style and then you go maybe i need to go this path but nobody ever shows you the numbers it's more of the feeling you got from this person versus the analytics of the calculation so we want to talk about number one i want to do a case study of misinterpreting financial advice and we see this so often because there is one there's a lot of bad financial information out there that's just that's just the fact there's a lot of snakes in our industry there's a lot of folks who just don't share really sound financial management information but there are others that share a lot of really really good information but just because the information they share is good doesn't mean that when we hear it when we receive it we interpret it correctly and sometimes we can take good information apply it in the wrong way and it'll have us ending up in a place that we don't want to be in so let's kind of talk about this because i have i have a case study of this was um somebody that i knew that you know was in my orbit you could say um high income attorney you know is a young attorney but he's quickly in a high career trajectory and they had gotten excited about getting out of debt all debt because then look this is how this kind of builds up is it you get out of the credit cards which we all agree credit cards are portable on you can use credit cards but credit card debt is a no no if you have any credit card debt you're not winning the game you're actually turning compounding interest upside down so this person was so excited after they got all their credit cards paid off that they decided they were going to keep that feel-good moment going and they were paying off low-interest student loan debt they were considering you know doing things that was costing them employer matches that's i mean and we talk about that if you if you talk about the financial order of operations step number two is get that free money from your employer match i can't believe anybody would walk away from a 50 or 100 percent guaranteed rate of return but we see people do it all the time yeah it's pretty it's pretty obvious that we say this on the show at least every time we talk about this if we were to say hey shoot us an email and we're going to send you 20 bucks every single person would shoot us that email so they could get their 20 dollars your employer is doing the exact same thing hey if you just put a little bit of skin in this game we are going to give you free money yet for some reason because it's not something in my hands that i can go spend a day i don't take advantage of it that's crazy that's just missing a huge huge opportunity another thing you know just because i want to close out the free money section of this is we see people that are not taking advantage look i told you credit card debt is a four-letter word you can't use credit card debt but you can use credit cards for all types of things make sure you're maximizing rewards if you've got think about things that you don't have a behavioral side to it you know you're going to pay your utility short every month and it's not really using a credit card to pay that is not changing it's not changing consumption your annual insurance premiums for for certain things because you bo i know you've had a history of you found that you could pay sometimes you could pay your property in casualty and other things those type of things are not influenced by your behavior of using the credit card these are just fixed large expenses that you can maximize to your benefit and then shopping ninja skills we're not going to go a deep dive on this we've done so many shows just talking about shopping portals you know rewards and other things just make sure you're not leaving free money on the table if you're someone who does shop online or use those resources go to moneyguy.com click on our archives and search shopping ninja and we'll walk you through how to make sure that you're stretching your dollar three to five percent further than all of your peers at some point it's probably a deliverable sure we do have a three-prong approach to hitting that we could easily turn that into a deliverable but let's talk about how you get debt payment out of whack because that that really is the big thing i want to do a case study and a deep dive on and let's talk about specifically step number five of financial order of operations that's roth iras health savings accounts yep we all know roth iras do not get a tax deduction when you make the contribution what but the huge benefit is you get tax-free growth and you're going to see compounding interest we talk about 88 times over all the time is so powerful health savings accounts triple tax advantage you do get the tax deduction on those contributions you also get to let them grow tax deferred and then if you use them for qualified medical expenses all the growth all the income is completely tax free it's hard to beat all the activity that you can do in step number five so you're hearing this and you're thinking man tax-free savings that's pretty incredible that's pretty amazing well the government's kind of recognized that too and what they've said is if you make over a certain amount of income if you're a single person you make over this amount if you're married you make over that amount you can't even contribute directly to a roth ira anymore so for a lot of folks who have an income trajectory or maybe early in their career they're not making as much but odds are their income is going to keep going up there's a chance that their window for even getting money into a roth ira is shrinking and shrinking and shrinking so if you're not taking advantage of that because perhaps you're doing something else you might be missing a huge opportunity that you can't get that water back up the hill on this attorney i'm thinking of is because they because look i realize student loan interest comes in different shapes short sizes this one i know for a fact was an interest rate less than five percent so i would classify that as low interest debt whereas especially if you're in a lower income situation because this was a brand new attorney high trajectory meaning that i knew it was only a matter of two to three years before they were crossing six-figure status but at the time they'd still been eligible for the interest deduction on the on the student loan interest and they also could have really taken advantage of the compounding interest and letting that army of dollar bills do the heavy lifting and we decided we'd do a case study let's show somebody let's show everybody what we're actually talking about here when you put numbers to it yeah so we talk we're going to combine sort of those two ideas prepaying student loan debt and also missing an employer match so let's use a case study let's look at two individuals we're going to call them caitlin and thomas and say they recently graduated law school at the age of 25. they both ended up with a hundred thousand dollars in student loan debt at four percent interest and a 20-year term so it's going to take 20 years for them to pay back those student loans well kailyn decides she's going to pay an extra 500 per month on the loans to try to get those loans satisfied quickly however thomas is going to save 500 per month to his employer 401k so that he gets a match so he's going to have that 500 go into his his retirement account and he's going to get a match on that money 500 from his employer as well before you go any further i want to make sure i'm clear on this because we get when we do these case studies there's a lot of questions that come up dollar for dollar these are the exact same sums coming out that's exactly right so if you you know 500 dollars coming from caitlin 500 is coming from thomas there is no difference in the money actually leaving their household so they're going to go on these two trajectories and let's see how it plays out so what happens is over that 20 years thomas actually pays 145 000 for the hundred thousand dollars of student loans so over the course that twenty year period he paid forty five thousand dollars of interest well if you look at caitlin because she was paying extra she actually had her loan paid off over nine years and she only paid about 119 000 so she saved 26 000 in interest over thomas so right there you'd say man caitlyn had this figured out she must have recognized it if i just pay that little bit extra i can get out of this debt and i can save interest surely that was the right decision and this is the part when you go look at our previous shows on this where we've done it it doesn't matter if it's mortgage analysis it doesn't matter if it's student loan that everybody always says you guys do not take into account all the money they saved in interest we're right here showing you that's why we took an extra step here caitlyn without a doubt is winning the game of saving interest because she saved as this shows 26 000 but is that where it ends i don't think so because remember that money had an opportunity to go do something completely different and that is the opportunity cost because remember thomas decided he was actually going to take that 500 and put his army of dollar bills to work so what does that look like yeah so what thomas actually did is he took his 500 and he put it to work but remember there was an employer match involved so his dollars even get supercharged so he starts getting his match at age 25. well caitlyn because she waited until she paid off the student loans she didn't actually start getting her match until nine years in after she had paid off all of the student loans well what we find is that age 45 at the end of the term both of them have no student loans they are both at a zero balance on their student loans but thomas has 743 thousand dollars in his 401 k because he got his army of dollar bills working and he didn't walk away from the free money caitlyn only has about 257 000 in her 401k and i want to repeat zero difference in what came out of pocket yep but yet there's close to a 500 000 terminal benefit that's exactly and and caitlin and i have to believe when caitlyn made this decision said you know what i'm going to be responsible i've got this debt i'm going to get rid of this debt i'm going to pay it off that's a good thing it's not like she went and blew the 500 it's not like she was out spending the money she was making a wise financial decision in theory however it was not the optimal financial decision had she been following the financial order of operations by the age of 45 she'd been half a million dollars better than she ended up being so here's where i think this thing goes sideways a little bit as a lot of people will say what you guys don't understand is that when i get completely debt free i'm going to take every dollar that was going towards that debt and i'm going to i have this mindset where i'm going to put it all towards the future how could i not because i won't be paying interest the problem with that guys is that what you're missing out on is that every dollar you have when you're in your 20s is worth a lot more than the money you have when you're in your 50s because that time remember wealth is surprisingly simple but the creation is a lot harder because people aren't taking advantage of what does it take it takes discipline yep it takes money meaning that you use that discipline you're living on less than you make and that turns into money excess margin in your lifestyle and then you actually put that to work for an extended period of time so you have discipline money and time don't neglect don't disrespect how valuable that time is to creating that wealth and that's the problem with these dollars if you have low interest debt i'm talking about especially we're an environment now and we're about to talk about mortgage interest and and that's what this is probably a great transition to kind of go into number two is mortgage free at all expense because realize people get so excited about becoming debt free and this is one i even want to give cover for somebody that lives in our backyard yes that a lot of people will get excited because dave ramsey has them and everybody at ramsey solutions has them excited about getting out of debt but then they screw it up they're not even doing the babysitter that's right they are doing davish yep whereas they get so excited about getting out of credit card debt they get so excited about the high interest student loan debt because remember you do need to make an analysis is this low interest or is this high interest student loan debt and then they move on right to the low interest mortgage that's right and mortgage i think is a really interesting one because we just showed that you know where caitlyn and thomas the previous example ended up okay sheila ended up in a less than optimal situation but she still had some savings built up the mortgage is a little bit different mortgage is one that can leave you in a more dire circumstance and you don't even realize it well i think mortgages because we're now talking about interest rates that are less than three percent holy cow i mean can you fast forward and think about what this looks like in uh years in the future as interest rates go up but i do want to bring it back to a case study okay um i you know i i i have a sunday school class and i had one when i first started doing this sunday school class with another couple um we had i had a a woman come up to me she was brand new to the class and she says i'm a widow and i want you know as soon as i found out what you did for a living i want you i want to tell you something so nobody else makes the mistake that i made okay and here's what her story was is that her husband passed away um you know kind of younger um this was sub 50 so this was kind of unexpected and she got some life insurance money and a lot of the people in you know around her said you know what you need to do you need to just pay off the mortgage just go ahead and get rid of that debt because that way if no matter what comes your way you'll have a paid for house you have shelter over your head and she says she did that she took that life insurance money and this is somebody by the way in their 40s so i don't even i you know i'm prepaying debt it's not i'm not gonna fight you on that if it's the right time in your financial order of operations but here's the rest of the story on this is she goes i used all that life insurance money paid off the debt and then i still got kids in the house when it came time to buy them supplies for school when it came time to pay insurance premiums when it came time to pay property taxes i didn't have any liquidity to pay the bills so i you know because and this is something we say all the time though you can't eat a house can't eat a house so i mean you can have all the equity in the world in your house but if you need cash if you need money you're going to be in trouble now there's nothing wrong i think i always like a more balanced approach and this is what i love about what we've created with financial world operations is that if she would have probably done a balance meaning made sure she had the cash reserves settled up made sure she had enough money set forward for the future there probably was a chunk of money that could have gone towards the mortgage absolutely to pay it down substantially faster but it didn't need to be an all or nothing type strategy which a lot of people when they're so excited about getting out of debt that they screw that whole process up and what i think is really interesting is this does not just happen with windfalls this isn't this we don't just see this when someone comes into life insurance or an inheritance or something like that we see this a lot with folks who are planning for financial independence and they're under the impression that this is the prudent way to get to financial independence what they don't realize is that wealth building is a young person's game it is i mean it really is i mean think about when you're 20 years old you can swing for the fences on risk you can do an s p type 5 500 equivalent type investment which historically around 10 every year if you can make it through the the ups and downs remember you're walking up that mountain with the yoyo yes there's ups and downs in the short term but long term it's good and also young man's game young woman's game and the fact that while you're in your 20s you actually should be very excited every time the market is getting its teeth kicked in get excited because you got a lot more that you're buying versus a you're not using much at that point you're building your army of dollar bills but people get so thrown off on this is that they don't understand when you're 20 years old every dollar has the power to become 88 exactly right when you're 30 every dollars has the power to become 23 dollars because realize as you get older you're going to have to start dialing down the risk you'll start adding more asset allocation by the time you're 40 years old every dollar by the time you turn 65 has the potential to turn into seven dollars do you hear those drop-offs 88 23. now we're at seven guys this is a young person's game make sure you're not squandering that opportunity because remember what are the three components of wealth creation it's discipline it's money from the margin that you've created and then give it the respect of the time to let it grow yeah and brian you said earlier something i think is so interesting i hear this from a lot of folks in the fire movements but especially those folks who are in their 30s and 40s and or who want to be financially independent in their 30s and 40s and say no i'm going to get my debt paid off and then i'm going to have all that extra money that i can throw in the portfolio so once i get that gone well i would encourage you if you're someone who has that mindset i want you to go to our website go to moneyguy.com resources and i want you to look at our wealth multiplier now the actual name of this thing is called how powerful are your dollars because somebody told us it's not called wealth multiplier that's just what we dubbed it what this shows is exactly how powerful every dollar can be at each age so if you're a 33 year old thinking man should i really pre-pay my mortgage or should i take that money have it work for me every dollar that you deploy at age 33 will turn over 16 times by the time you hit 65. if you don't understand this concept go download this deliverable it's completely free take this and use this to inform yourself in how you make financial decisions so you hit it you just said what we think is the extreme which is a lot of people will say especially as you mentioned we've kind of the fire movement financial independence retire early they think that if they can get out of debt they will then throw all of the throw everything but the kitchen sink on top of saving for the future we're not even when we do this case study bow we're not even going to take that extreme of a approach what i wanted to do was i said let's go with this in a different route what if you're because remember this is the other part we talk about the messy middle of your 30s you got typically you're new to marriage new to owning houses new to having children and so life is just kicking you all over the place so margin especially remember that component of wealth creation which is discipline and then money you've got to have the money so you can have army of dollar bills that's harder to do especially when you're told you've got to go buy a 15 year mortgage especially if you're in a rising uh appreciating real estate market if you live on either either the coast or in a hot city like austin texas or national tennessee i mean i feel so bad i've had so many discussions with even our own employees and i'm like look the reality is you might not have twenty percent on the first house i'm giving you a pass on that first house so make sure you understand that you just gotta get on the train so you can have the shelter so you can have the money and and have it working for you by getting the benefits of home ownership and then people just take it the extreme and they say well i've been told i need to do a 15 year mortgage well yeah i love that because i know the stat that the typical millionaire according to some of the research is they pay their house off in 10 years we know that stat that's not their first house not the first home it's typically the third home and by the way i resemble this status that you do once you cross 45 and as we told you that wealth multiplier impact is much smaller there is nothing wrong with attacking the debt but what i'm worried about is that 20-something or that 30-something that chooses a 15-year mortgage versus a traditional 30-year mortgage not realizing they might need that margin so they can still have money for for paying all the bills taking care of the kiddos as well as making sure your army of dollar bills is not disrespected i'll take it a step further and say i just think it's really solid and sound mathematics given where interest rates are right now because again conventional wisdom used to be yeah do the 15 year do that well now that conventional wisdom might not hold so true so again in true money guy fashion we wanted to do a case study we wanted to kind of put the numbers to the test to see if it actually pans out so uh fte daniel again hooking us up with an illustration let's take two individuals dave and melissa and let's assume that they're both 25 years old and they both are going to buy a home and let's say that the purchase price of that home is three hundred thousand dollars they're going to put twenty percent down so they're both going to take out a mortgage of two hundred forty thousand dollars so two 25 year olds they're gonna buy each buy a house two hundred forty thousand dollar mortgage uh dave says you know what i'm going to go with conventional wisdom i'm going to do a 15-year mortgage melissa says you know i've been listening to the money guy show i think i'm going to go with a 30-year well because dave did the 15-year he gets a more attractive mortgage rate his interest rate on his mortgage is only two and a half percent melissa has to take a slightly higher rate because she's doing a 30-year so her rate's going to be 3.25 so dave already is looking much better here dave's monthly payment just like you said because it's a 15-year mortgage is higher he's got to pay 1600 a month on his mortgage because melissa is stretching hers out over 30 years her monthly mortgage payment is only a little over a thousand dollars at a thousand and forty four dollars so wait a minute wait a minute i wanna there's several things here first of all 15-year mortgage two and a half percent i get excited that sounds exciting but i'm also in my late 40s so i should get excited over a 15-year versus a 30-year here's another key thing the same house there was no difference in purchase price these houses we have a 300 000 house we're also only financing 80 doing all the conventional things that you're told the difference in the monthly payment is 1600 on the 15-year versus a 30 years a thousand forty four that leaves an additional 500 plus dollars of extra margin that's right so what are we gonna do with that five hundred dollars so here's what we're gonna so we're gonna assume melissa recognizes there's an opportunity here so she's gonna invest that extra 556 dollars well then once her mortgage is paid off after 30 years she's going to invest the full amount the 600 dave because his mortgage will be gone after 15 years he's actually going to start investing sixteen hundred dollars after 15 years so again and you said this earlier brian this is the exact same cash outflow they are both for the next 30 years gonna have sixteen hundred dollars a month flowing out days is going to go all to the mortgage melissa's is going to have a thousand go to the mortgage but an extra 556 dollars is going to go to an investment account so we've done this before we did this called this tell of two savers yeah exactly what's title now but guys this is the new and improved we took all of your negative comments and we said let's go let's go troll slam you know so we're knocking them down with the hammer you go wait until you see what we've done with this so let's look at how both of them look so if you're again if you're listening out on itunes i heart radio stitcher any of those places spotify you ought to go check out the youtube because this illustration is really really powerful because here's what i think is interesting at age 30 so after the first five years dave's mortgage is down to a little over a hundred and sixty-nine thousand melissa still all still uh owes 214 thousand dollars so dave has been knocking down the mortgage hardcore but melissa does have about forty three thousand dollars invested so she has a little bit of money saved up by age 40 and this is what i think is really remarkable dave is completely debt free yeah he has no mortgage he owns his house he gets to sit on the earth that he has but he also has no investments so i got to think at age at age 40. dave's feelings feeling great he's sweet even though he you know he's not looking over at melissa's page yet to see what she's doing because he's feeling really good about being debt-free meanwhile melissa still has a mortgage she still has a hundred and forty eight thousand dollar mortgage when dave just paid his off so if they're at the cocktail party dave is bragging and melissa's like oh man did i make the right decision however she does have two hundred and twelve thousand dollars saved up so technically if you look at the total net net she's sixty four thousand dollars ahead of dave at at age 40 right so 15 years in well if we go to 50 now remember dave started saving more money as soon as his as soon as his mortgage has paid off so he has 1600 a month going into the investment account at that time melissa only still has 556 going in so he's saving three times as much on a monthly basis well at age 50 he still has zero mortgage he's actually built up now almost three hundred thousand dollars 296 000. melissa still has the mortgage that thing's still hanging around she owes 58 000 but her investment account is worth 573 000 so now at age 50 after 25 years she is almost 220 000 ahead of dave now before we we kind of go to the grad you know go to to 60 the graduation point here to see what things look like if you're making decisions on retirement i noticed there's some fine print at the bottom of this yes that we didn't get so crafty that we assumed hey you're gonna put this in an s p 500 index fund during the entire short 30 to 40 year period we're actually i see a little slope there a glide path you know in your 20s it's 10 percent 30s it's 9 in your 40s it's dropping down to 8 and by the time you're in your fifties it's seven percent and you see we keep dropping it down into six percent even in your 60s that is the way it works right in real life too is you dial the risk down that's all accounted for all the interest expense are accounted for this is an apples to apple so what's the big impact and this is how we're able to do a show title like your decision can cost you millions that's right by age 60 they are both debt free so they both now own their home dave has an investment portfolio worth eight hundred and seventy one thousand dollars which is excellent eight hundred seventy one thousand nothing to be scoffed at however melissa's portfolio she's also debt free but she now has over 1.2 million dollars almost 1.25 million dollars it is a 377 thousand dollar difference and i just think it's worth reminding you they both had the exact same amount of money flowing out every month from the time they were 25 all the way until they were 60. so this difference could be also like roth savings is here but remember these are typically the same person that's making this mistake is also missing out on that employer match for that period i'm telling you if you start stacking these differences you quickly can see that this is not a six figure mistake this could quickly turn into a seven figure mistake without a zero difference in how the dollars were spent it's all on the decision making it's all about the financial order of operations and getting things out of whack and not maximizing every dollar that comes into your per your custody and making sure you are using maximization techniques now i do think i'm going to throw a disclaimer out real quick because a lot of folks in the chat one of the beautiful things about the live chat is we can see what you're saying here saying yeah i did a mix i'm still investing but i'm paying all we're trying to lay out for is the mathematics the beautiful thing about financial planning is it's part math and science but there's also part art to it you have to think about what are your ultimate goals what are the things you're what's your words what's your why we're not saying that one of these is a hundred percent right and the other is 100 wrong we're just showing you the numbers so that you can make an informed decision to take your finances to the next level and look i i will tell you i am post 45 so i have been working on accelerating my debt payment because i'm way past saving 25 of my income it makes complete sense to be responsible and get that debt paid off because i can i mean it is one of those things but you and i had several discussions in march when the stock market got crushed you're like you're crazy if you're still accelerating your debt prepayment right now and i took it to heart i was like you know what he's always right i mean because my interest rate is super low on this mortgage i ought to probably take these next few months while the market has this type of volatility has this type of valuation ought to load up everything that was going towards that low interest mortgage ought to go into the equity markets and sure enough it did now i mean it is one of those things that i think that you have to take into account your why you have to take into account what you're saving because remember i have no problem here's the thing i think is interesting about financial order of operations the trick question that would be out there in trivial pursuit if you were doing foo edition of this is can you be 35 years old or even 30 years old and pre-pay your mortgage and brian and bo not get mad at you yeah the answer is yes absolutely because you've gone through all the other steps of the financial order of operation is that you've saving 25 of your income you're saving to make sure that all your prepaid expenses of thinking about the kiddos college and other things and all those things have been respected and you still have money because maybe you're in a high income situation yeah go knock it out go go destroy the debt i'm perfectly fine with that because you've paid respect to the financial order of operations and done it in the right order yep i love it love it love it so let's move on and this one by the way i have thrown so much shade at other uh you know i've talked about people from sunday school classes i've talked about prospects we've talked about clients it's time to be a little more self-reflective because this number three on what we're gonna go here on a case study is yours truly yep this is brian so here's the thing is number three is thinking you're not going to have a rainy day no i think this is beautiful brian because you're the eternal optimist i am you just do even when we were talking about like how to name this section of the show you're like guys i don't want to talk about it like can we just talk about how we're just thinking all the days are going to be sunny i was like that is your eternal optimism coming out but when it comes to like prudent sound financial planning it might while it's great to be an optimist we need to recognize that not all the days are gonna be sunny i love the infographic daniel did here where it's like a sunshine every single day it doesn't always work that way yeah don't weathermen wish it was that way and that's what what i think is interesting is that if you know it by the way it's good to be an optimist yeah all of our wealth studies that we've done here for the moneyguy show when we do our our wealth index and we send out to clients the majority the vast majority of our of our successful clients are optimists so i'm actually very happy to be a glass half full personality but it is a blind spot and i've gotten caught up in this and i want to share with you guys so that you didn't also let the the rosy outlook cloud you from respecting the financial order of operations and doing things wrong because what do we know is in the financial order of operation step number one is deductibles covered and why do we have deductibles covered and only deductibles covered we didn't call it emergency reserves yet we just said deductibles covered the reason is we're trying to keep your financial life out of the ditch yeah they're gonna become things and you're worried about the big stuff that could happen whether it's a medical event you want to make sure you have your your hsa deductibles covered or there could be a you know a car accident or a car repair that you need to do so you need to make sure you have your comprehensive and collision deductibles covered and by the way you don't have to stack these things i think a lot of people get confused when they when we're doing step number one and they think that okay if i know that my out of pocket is like thirty five hundred dollars and then my i have a thousand dollars or 1500 on the cars you don't have to do 5 000 in total you need to make sure you have 3 500 it's the highest of the two odds are you're not going to hit them all at once it's going to be one or the other so go write down all your deductibles and make sure you have at least the highest one covered and you know you've kind of graduated past step one step four is emergency results i mean because this is this is what i got myself in trouble with and this is this is easy to do realize when we got to 2008 which the big if you don't know the great recession a big driving factor of it was real estate sure the debt specifically with real estate with mortgage-backed securities and all these things well here's here's what was being pushed out there at the time god ain't making more real estate so real estate does not lose value down in value that's what i mean that really is kind of everybody thinking real estate was forever and ever and look i do agree in a lot of ways it is a limited supply of issues sure so there is there's a a nugget of truth in that statement the problem is there's a lot of ups and downs that can happen in that long term walk up the mountain that you're dealing with with real estate well i was in a house that i bought in the early 2000s that had appreciated nicely and i had and bo i don't even mind if you show this at the time in 2006 i uh my house was appraised at 510 000. now you bought the house in 2003 2015 2003. you did not pay 500 000 410 for this if you took into account in a couple years you have like six figures of growth meaning six figures of cash reserves why would you need cash reserves because they have these beautiful things that they created at the time well you still can get them it's just they're not as sexy as they were then it's home equity lines of credit sure i mean the banks were so excited about this that they'd actually drive out to your you know to where you live or where you work it'd be a no-cost refinancing they cover all the recording fees they do everything they even drive out and then right after about a week after you closed after they showed up at your house you get a checkbook yep and you get a debit slash credit card that you could use towards the home equity line and man this is great who needs cash i got this six figures of equity and i think you guys know the rest of the story and here's what i had happen to me wells fargo let me know in 2010 so we're right remember the downturn was late 2008 but it took because real estate this is another thing people need to understand you see with the financial markets the stock market we have what's called a v-shape recovery meaning that it gets overheated then people start selling and gets overheated on the selling side and then people realize wait a minute people are always going to buy coca-cola so you know the price will start sure immediately v-shape recovery will go down and then pop back up real estate has what's known as a u-shaped recovery meaning that you can get your teeth kicked in and then it just drags on the bottom for a little bit so that's what happened 2008 happened took a little time for the bad news to really have full impact on my real estate but you can see in march of 2010 my 510 000 house according to wells fargo is now worth 273 thousand dollars well that's okay brian because you did have equity in there of like six figures so they still let you keep that right like they still let you write checks off of it and have access to your pseudo emergency reserve accounts right so here's the thing because i'm i'm willing to admit what i've learned y'all think like i did a previous example of 15 year versus 30 year mortgage you know what type of mortgage brian had back then during this period too actually 15-year mortgage oh yes so why not load it up so i had no i not only did i have a higher payment asked to me but i also the reason wells fargo was so nice to let me know that my house was no longer worth the reason i have this letter is they were also saying hey by the way that home equity line of credit we gave you access to don't write any more checks don't use it because we've we've shut down your checkbook we've shut down your debit card access you are stuck paying what you own and if you need cash don't worry we'll just take your house i mean because that's kind of what they're telling you because i had if you did not have liquidity you were going to get hosed in this transaction and that's the big thing i realized and i never ever ever will neglect in financial order of operations step number one which is deductibles covered and step number four emergency reserves ever again because just because you have this fault sense of security does not mean that your financial life is in a good place and so it's easy to think about think about every all the days being sunny when it comes to like emergency reserves and cash on hand but that's not the only place that we see it we also see it with like risk management i can't tell you how many times we'll talk to a potential client or new client and say hey you know you're really underinsured from a life insurance perspective you ought to think about having more their answers no i make tons of money the fan will be fine well what you don't realize is like if you get hit by a bus tomorrow you're not making tons of money anymore that's the reason that you have it or we see this one a lot we'll say hey do you have updated estate documents let me oh yeah you know we talked about that but we just can't figure out what's going to happen with the kids and who would take it so we just haven't done it we always immediately follow that with if you think that it's difficult for you to have the conversation about where your money is going to go and who's going to take care of the kids if it's hard for you to figure that out imagine how much more difficult it will be if you're not here to speak for yourself and your family has to figure it out or the court system has to figure it out you want to make sure that you're covering those bases because we hope we hope that you never have to enact those things we hope that these state documents are just a thing that sit in a safe deposit box and you have to worry about for 50 more years but in the event that it does happen it is invaluable to have those documents in place and up to date yeah and think about like as you mentioned insurance sure term insurance is one of the most valuable things that you can look we're that you can have i mean we use a lot of it ourselves but here's something i think people get confused about they're trying to like why would i do term versus permanent guys you got to figure out you got to make some estimations of where graduation is where you will be self-reliant meaning that you're either financially because that's what your financial independent because part of what you're buying term insurance for is to cover all the promises all the obligation obligations you wouldn't be able to fulfill if you were taken prematurely so if you're young and you have children in the house go figure out when will the kids be out of the house when will i be financially independent if those things line up and maybe that's in 20 years 20 year term it's great now also protect you from medical issues that come down the pipe it's just something you really ought to consider another thing we didn't give any attention to but it's worth at least mentioning disability you're much more look we're all going to die so it's ridiculous for me to say you're much more likely to be disabled than you are to die because that's not completely true but it is you're much more likely to become disabled before you've left employment is really kind of the the stress you need to focus on that so pay attention to that insuring your income ensuring you're incapacitated all that stuff is super important and you just um and look like i said coming from an optimist you've got to ensure that you're in a good place no matter what comes down the pipe you don't want to assume that every day is going to be a bad day or it's going to be rain and storm clouds however you want to make sure you've got the umbrella just in case and that's the way that you ought to approach your financial decision and it lets you take more risks if you go ahead and cover all of these type of obligations and concerns then you can feel comfortable yeah it's okay that i'm out here hitting the accelerator in other places yep let's transition this one's gonna be kind of trigger the contrarian button with a lot of people because they're like what how is that even an issue and that's what look we are unapologetic that the money guy show is for the 20 that is looking to maximize their financial life we're not for the 80 percent we are for the 20 that want to maximize so this is going to be a problem for the 20 and we see this all the time is number four you're retirement rich and completely illiquid now when i hear that a niche i'm thinking retirement rich that sounds like a pretty good thing that sounds like you know maybe a more appropriate title here would have been retirement account rich and illiquid well because let's set this up because i want people people go read that title and go i i'm scratching my head on this one but we see it from time to time we'll have prospects come in and they will come to us with seven figures in their retirement accounts congratulations awesome it's a great by the way all the research shows that this happens all the time is because the typical millionaire is 49 years of age when they reach that status but they they reach it primarily usually the first status symbol that they've actually reached seven-figure sas is their employer employer-provided retirement plan so it's not uncommon for this to happen but here's the issue you've got kiddos you've decided you want to kind of um you know maybe do things a little differently you want to retire early sure or other things you got to pay for college education you got to pay for upcoming cars and then but the problem is you're not old enough to do it you can't get to the money or it's going to cost you a fortune meaning to pull 60 000 out you're gonna have to go take 90 000 to out of your retirement account that is a less than ideal situation so this is why one of the things that we focus on is in step seven of the financial order of operations we talk about hyper accumulation now a lot of folks hear that they think oh you're talking about i need to go from 15 to 20 to 25 of my saving yeah that's true that's one piece of it but another big piece that happens in the hyper accumulation phase is that generally is when you start thinking about not just how i'm diversifying my assets my investments how am i diversifying the tax structure and the accounts that i house my assets inside of so you just nailed it in the fact that we talk about tax location and when people say what the heck is tax location we're really talking about diversification of the tax situation of all of your different bucket of assets so we have created bo go over the bucket list with them yeah so we thought about really when you get to retirement you want to have three distinct buckets that you've built up you want to have your tax-free accounts those are like your roths your hsas those are the exciting ones they are bulletproof those are the ones that are awesome you would love to have tax-free assets because you can do a lot of stuff with those once you get to retirement i notice on the visual there's no holes on that there's no puddle of water underneath that bucket in that one because it's a solid one it's jammed up so you don't get a tax deduction when you put the money in but when you put water in that bucket it holds that but that that bucket holds its value that's exactly right well then there is the taxable bucket or the after tax bucket this one's great too this is the one that most often gets activated inside of step seven hyper accumulation but you'll notice there's a little leak to it one of the beautiful thing about tax free accounts and tax deferred accounts is that while they're growing while they're out there and your dollars are compounding you're not paying any tax on them well inside of a taxable account you do have to actually pay tax on a year-over-year basis as you get dividends or income that's paid out to you or as you buy and sell you do have to pay taxes on those accounts so you are losing a little bit of your return a few soldiers in your army to tax drag now the good news is some of these taxes are actually in a favored rate status meaning dividends qualified dividends get a lower tax rate if you think about capital gains if as long as you're a long-term holding sure they get a bit more favorable tax rate so even though there's a tax headwind there are some nice the fact that they're cheaper and is is better so it does make the leak a little severe it helps you know it's like it's not the you know the guy that used to slap the duct tape on the boat and it's still floating is not that good but it's pretty good well then there is your tax deferred bucket now this bucket is great when you're growing because just like the tax free account the dollars grow tax deferred so you don't have any tax drag while you're building it up however there are some issues you can't get to this money until certain requirements are met you got to be a certain age to be able to access this and then when you actually can start getting to those dollars you've got to pay ordinary income tax rates not capital gain rates ordinary income tax rates highest rates are going to be ordinary income tax rate so you got to pay attention to that bo there was even more because they also make you take the money 72 you're going to take required minimum distribution so here's here's the deal the government makes we we're going to give you a tax deduction we're also when you make the contributions we're also going to let these assets grow without taxes being taken on all the income all the capital appreciation however once you reach the success point of 72 you've lived long enough that the game's over we're gonna start getting our tax dollars over your actuarial life we're gonna start requiring you every year to take a certain sum out so that we can start collecting our taxes or our ordinary income tax rates and you know what happens if you're really good at this it's going to push you up through the rates pretty quickly that's right so what i think is interesting about the buckets is we still think there should be three buckets because there are pros and cons to each one of these so when you think about building up to financial independence when you think about hyper accumulation we want you to establish all three of these buckets because when you have a tax deferred account the dollars go in pre-tax and they're taxed up on distribution so there's a huge current year present tax benefit if you're funding that tax deferred bucket we all see that when we're doing like traditional 401k contributions for the taxable account dollars go in after tax you don't get to defer the taxes but you can get to that money tomorrow if you need to you don't have to wait till a certain age there are no penalties for pulling it out you can get to it and the tax free account is great the dollar is going after tax so no deduction but when you get to retirement pull it out it's completely tax free which is a huge benefit so there are pros and cons to each so i just found myself because i know we have just thrown so much knowledge at the audience that some of them are probably like did he just turn into did we all just turn into the peanuts teacher with the wah wah wah wah wah so i think an illustration will fix this because it is so much easier when we did this because we knew that we were throwing so much at you we said the easy way to look at this is what happens as you're investing 500 into each of these buckets what's the ultimate impact so bo walk them through the actual illustration case study so they know what's going on perfect so if you take 500 a month in each account starting at age 30 we're going to put 500 into all three buckets and we're going to assume the tax deferred account grows at 8 percent from age 30 all the way to retirement we're also going to assume that the tax free the roth account grows at eight percent from age thirty to retirement now because of taxable account because we have to pay tax on that every year we're going to put a tax drag factor on that so it's only going to grow at seven percent by age 65 in your tax deferred account you would have saved you'd have a little over 1.1 million dollars built up for retirement however 1.1 million dollars in a tax deferred account is not actually worth 1.1 million dollars because you got to pay tax when you pull it out so if we just assume a 24 tax bracket again this is a very elemental elementary illustration in the tax deferred account you'd actually have about 872 000 available to spend compare that to your taxable account where you'd actually have 900 000 available to spend and then you can look at your tax-free account the 1.1 that it was worth is actually what it's worth when you go to pull it out again what we think is your goal should not be to only have all of your assets all of your wealth all of your money in just one of these accounts if you really want to do it the right way you should focus on building all three of these buckets through your accumulation stage so here's the key things to also take out of this is that you know like that tax deferred now look we have an illustration here where we did deferred taxes on the full 1.1 million dollars we know that that's realistically going to happen over your lifetime sure but it does it is worth saying remember if you die with that 1.1 million dollars you don't get a step up in basis right that is a key thing so at some point someone will pay the income taxes on that tax deferred and look i feel like because we just did a 401k show that's being very well received there are some key benefits to why we love people to focus on saving in those retirement accounts because you get the free match you get to let the money grow without taxation but you just need to be aware just like you have diversification of your asset allocate asset allocation meaning that sometimes you know s p 500 large cap is going to do better than international sometimes bonds is going to do better than the s p 500 it's nice to have a mix of all those things we're just trying to show you it makes sense to not choose winners or losers between these different accounts you actually want to have money in all three of these buckets that's what we're telling you i'm not trying to tell you to choose the winner or loser i'm just trying to make sure you understand the why of your portfolio so that you can make sure each bucket has enough water in it so when you get to retirement it doesn't matter if you're 50 years old 55 years old 65 years old you're going to have the right asset structure to get you through the whole journey and i you know i think this is the super sexy part about it not only if you're 50 years old or you can have the right asset structure to be able to get to your money but we see this present day with a number of our clients who have large seven figure portfolios and potentially they're living off of six figure incomes yet because they have the different tax structure they're paying the lowest marginal tax brackets because they can play the tax game what i think is great is when you get to retirement no matter what tax policy is no matter what the highest tax rates are no matter where you are if you have these three tax buckets you get to control and maneuver what you pay in taxes and that is ultimate financial independence so i want to close this show out because i know we've loaded everybody up with a lot of love here you know case study number five was just putting the cart before the horse i don't know how daniel finds these pictures and again if if you're out there on spotify stitcher i hearts radio itunes daniel actually has a literal picture of a of a cart before before a horse and this is i mean because we hear we could have also probably titled this don't let the tax you know the tail the tax tail wag the dog because you hear that and look coming from a public accounting background a cpa background i get how this you can get your order where you're trying to you know save more on taxes than thinking about actually is this the optimal strategy but this also happens in a more emotional area as well we see this with parents they have a child you know and look i'm going to go ahead and tell you guys you don't know which of your friends are the crazy parents until after they have kids you can have friends that you go out with for years and you're having a good time and then they have kiddos and all of a sudden you don't see them anymore they just disappear because now at the center of their universe it's not the marriage it's not the friends or anything it's the kiddos i mean they are now the son can i confess something to you are you one of the weird parents no no oh i don't know here's all i don't know so brian you do this wonderful thing you've shared all this wisdom with me all through the time that we've been hanging out and you used to always tell me this one before i had kids hey bo you're not gonna know who their crazy parents are until they have kids and i was there thinking he said that about me he's waiting to see if we have kids we're gonna be the crazy ones i don't know if we did turn into the crazy ones but i just want you know that was always an insecurity because i was nervous i was going to be one of the psychos if you're not if you if you quit getting phone calls being asked to go out with friends then you're the crazy you might be the crazy parent but here's here's how you know also that you might be the crazy parent is that if you make the new york times cover with this headline is my retirement plan is you i mean and i have gotten so much thank you james for sharing this with us james is part of the money guy family he sent this article article to me and i was like finally i have something i can hang my hat on it because we have been telling you for years i'll say for decades that you do not want to get the financial order of operations wrong where you're saving for the kiddos college before you have your retirement taken care of because if you do it you're going to get the reward of being on the new york times letting your children know your adult children that congratulations i loved you so much i made you the center of my universe that i'm living in your basement because i want to pay you back with how miserable i was with not having anything but you that i'm now going to be in your basement for years to come look we all remember being on an airplane and i always say hey if something happens make sure you put the oxygen mask on yourself before you try to help others before you try to put it on your children your financial life is no different you have to make sure that you are on firm financial footing before you can start helping the kids because one of the things that's going to teach your kids is how to be on their own how to establish financial foundations for themselves if you get that out of whack it's just like brian said the worst gift you can give your kids is involuntarily moving into their basement now if you want to move in and they watch that's wonderful awesome that's great well i i wanted to be because that's the truth because you've got to do i mean i'm jealous of some of my neighbors who have the whole setup where parents live you know down the street and then all the siblings and everything around that that's an awesome structure i love that expanded family unit but you just want to make sure it's by choice that's right not because you made poor decisions and that's why if you want to know this is just to give you perspective if you go to moneyguy.com resources we have the nine steps of the financial order of operation you know where kids education falls it falls on number eight pre-paid future expenses number eight that's almost at the end brian that's not like number one or two that's like eight thousand seconds children that look i love my kids i don't want you all to misread this and think that you got the grinch here because you want to know who's wearing the christmas sweaters around christmas time it's this nerdy guy right here so i love the kiddos don't mishear me but i just want you to make sure you get this right i mean there's so many other things that are wealth creators that are ways that keep your life out of the ditch way before you get to number eight this is the only thing that is before this and or after this is prepaying low interest debt like your mortgage which is number two which is so interesting that there are seven steps before you can even consider the kiddos make sure you're not screwing that up because that is going to be what puts you in a completely different financial situation we've shown you so many case studies today that same dollar for dollar case studies of money went chose to go this left instead of going this right and they came out to two completely different answers and terminal values we don't want you to make those mistakes so what i think is so interesting brian is as we were going through this talking about these case studies again we have almost four decades of experience working with people we sort of recognized that there are some common threads there are some common traits and one of the things that we figured out is there's an instruction manual for your finances and we call it the financial order of operations you can go through the steps deductibles covered match from employer high interest debt emergency reserves roth or hsa tax-free accounts max out retirement options hyper accumulate the three bucket strategy pre-pay your future expenses and low interest debt prepayment what i think is so interesting is every one of those case studies we went through had they followed the financial order operations had they not gotten things out of whack every single one of them would have ended up in a better situation than they did if only they would have followed the steps if only they would have applied the correct pemdas to their financial circumstance so my here's my challenge for you guys first of all i want you to subscribe to the channel i am so i mean we've got to be within 10 of this thing flipping over to 80 000 which thank you thank you thank you for the money got family but i want you to go to moneyguy.com resources download the free short food deliverable because that's going to let you see all nine steps we lay that out for you see where you are take an inventory of have i made it through have i gotten anything out of order and then try to figure out how can i improve the situation now if you get to it and you're like i've done this well but i'm stuck in five six or seven i don't know how to get those things completely right we have gone enough completely new place for the money guy family i think you can tell by the 401k show we just did even the way we've laid out today's show we want the abundance cycle to stay intact meaning that you're going to come here and we're going to load you up with so much free advice you can't believe you're going to look at your spouse when you you get them listening to nerdy stuff like this too and be like can you believe these guys are giving this away and that's by look we're setting our own beautiful trap for you in the fact that i know look i'll call it that because what i want you to do is i want you to come learn apply grow your finances reach a level of success because we've given you so much free advice that you will get to a point of graduation and go oh my goodness i am at the point i need to hire a financial advisor we have done it right well i've realized there's a lot in between that learn apply and grow in the steps because we're getting this is no kidding guys i got to tell you we have a whole team of financial advisors and support staff that we get thousands of emails from you guys asking us questions and we work really hard to try to get you a lot of answers and a lot of them are process questions and it made me realize oh my goodness we're giving all this great free advice but we're not giving enough follow-through we're not doing worksheets we're not doing data gathering forms we're not doing the parts that will accelerate the process yeah you can come watch this show and probably listen to three years worth of our archives and have everything figured out but if you want to maximize just like i know we're the 20 we have a path now and that's with the financial order of operations course yep so go do the free resource see if you're stuck see if you need the worksheets see if you need the data gathering see if you need the motivation from your favorite nerdy guys that hang out with you and that's where the course comes in i think there's a little confusion about that so i wanted to make sure i clarified so you guys knew what the why was for this course nothing has changed we're going to keep loading up with tons of free advice we're just trying to accelerate the processes those of you that don't want to do three years worth of data unless you just want to be entertained you can accelerate the process and really speed up the implementation of the financial order of operations yeah and you can go see that at learn.moneyguy.com go check it out see what it's about see what you think and we are excited it will be going live on october 1st but right now you can order in the pre-order phase and we got a little bit of a discount and sending you a little bit of swag when you do that yeah i mean that's who doesn't love discount you know so discount plus the elusive tumbler all that can be yours but we're gonna keep giving you what we do remember hundred thousand by year in not gonna happen unless you subscribe we're trying to stall so much so it goes over 80 000 because i thought it was going you know what we're gonna answer some questions here at the end and we're gonna you wanna give away some of these today yeah let's give away some we're gonna answer some questions uh and here's my hope while we're answering questions i hope it crosses over if you're reading your seat in the audience make sure you subscribe and uh thank you for letting us do this show with you money guy team out

Channel: The Money Guy Show

Views: 32,534

Rating: 4.9503107 out of 5

Keywords: money guy show, debt, budget, cash, real estate, insurance, how to make money, save, credit card, compound interest, buying house, buy stock, success, personal finance

Id: sN-Pwu4rOno

Length: 63min 36sec (3816 seconds)

Published: Fri Sep 11 2020