The BIG Danger of Paying Down Your House!

welcome to another episode of ask the money guy and look i know we're kicking on this horse really hard bow but it's so important that people need to understand we love you paying down your mortgage i don't want you to mishear me i do want you to be completely debt free as you approach retirement but you have to understand the power of compounding interest there's about 20 years that you need to maximize all the opportunities plus all the craziness that happens in the messy middle today we want to do a case study that kind of proved our point a little bit further and we're going to walk through some common misnomers because we keep hearing from you guys which we love we love hearing your feedback we love hearing you guys leaning in saying no no guys you forgot about this oh well what about this oh well what about this well we didn't actually forget about those things we're going to address them front and center today as we kind of walk you through what we think are the pitfalls of paying off your home early so of course we couldn't start this show without having an fte daniel case study and i thought it was interesting we changed the name from dave to paul because a lot of people thought and that was truly that was the last time we did this we didn't do dave it was totally freudian at all so we changed the name to paul and melissa now we chose 33 years of age here's why we did this this is what i said daniel go find me what the average age for first-time home purchasers are and it was 33 years of age so that's the age we've made both paul and melissa i i found that so interesting because you were you weren't 33 when you bought your first house were you 25 25 and i was 21 when i bought my first house maybe 24. so when i heard 33 that just seemed but it makes sense you know you hear me a lot of houses are a nickel here in in georgia well not in tennessee but not in nashville in georgia houses were a nickel so it was a lot easier to buy a house when you're 24 years old whether they're cheap i just thought that was really interesting but we said okay so we want to stack the deck here and actually look at these two savers all right so we're going to look at paul and we're going to look at melissa and we're going to assume that they both buy a home they're going to purchase the home for 300 000 uh they're going to be responsible put 20 down so they both are going to take out a loan of 240 000 all right so we have equivalent purchases equivalent consumption here so if we look at paul he says you know what i want to be debt-free as early as possible and i've listened to all kinds of shows and i follow all the financial stuff and i know that a 15-year mortgage is the best way to do that so i'm going to go out and get a 15-year mortgage but melissa says you know what i listen to the money guy show and i've heard about this thing with this army of dollar bills and so i am just going to do a normal 30-year mortgage well because paul opted for the 15-year he actually gets a better rate he has a two and a half percent interest rate on his mortgage where melissa has to take a little premium on the 30 year she's actually going to pay 3.25 interest so if you amortize those two loans paul's minimum monthly payment is sixteen hundred dollars a month right look at principal and interest his minimum monthly payment is sixteen hundred for fifteen years for fifteen years well if we look at melissa her minimum payment because she gets to stretch it over 30 years is actually going to be a thousand and 44 dollars so it's roughly 550 less than pause but again we wanted to set this up to be an equivalent illustration so this is what we assumed paul's going to pay off his mortgage over that first 15 years and then starting in year 16 he's going to invest all sixteen hundred dollars right because that's the argument that we have people say you know what if i pay off my mortgage early i'm gonna have more money to invest sooner exactly right if you're someone making that argument in your head right now pay attention to the illustration and also realize because everybody always says are you guys including the interest yes yes we are totally including the interest as you'll notice we even give paul the benefit of since he's taking a shorter loan we give him a lower interest rate at two and a half percent melissa's three and a quarter that creates a headwind for melissa addition initially because realize they both start off with 240 000 melissa's paying more interest than paul is so we could have skewed this if we were just trying to prove our point for the sake of it we could have manipulated the data but we tried to make this as honest and true as possible so you guys can really see how this thing flows through so again remember we're trying to set up equivalent examples so we assume that in addition to melissa's 1044 dollar minimum mortgage payment she's going to invest an extra 556 dollars per month so what that means is both paul and melissa have sixteen hundred dollars flowing out every month it's the exact same number 1600 one of them just has it all going to the mortgage the other has it going to mortgage and then investing and then once melissa has her mortgage paid off in 30 years she's going to begin investing the full 1600 so if you're one of those people saying well i'm gonna be paul because i can invest more sooner that's true he can invest fifteen hundred uh sixteen hundred dollars earlier than melissa can but there's more to the story well yeah because melissa is going to have a huge head start on him she's going to start saving 556 dollars a month right from day one she's 33 years of age we know that that is a great multiplier when you're that age so show them the rest of this bo and then i want to talk about what if things don't go like paul and melissa anticipate when they hit the age of 43 which is 10 years after they bought this house so what we can see is that if you again if you're out there listening to this make sure you go out to youtube so you can actually see the visual here they both start with the same mortgage amount they both start with a mortgage of two hundred and forty thousand dollars well paul is going to pay all of his mortgage down by the time he gets to age 48 and then at age 48 he is going to start building up his investment assets melissa is going to start from day one building her investment assets and also satisfying her mortgage but she's going to satisfy the mortgage at a slower pace than paul is going to so we said just like what you mentioned brian if we look out 10 years how do they stand or where do they stand well after a 10-year period when they're both 43 years old paul still has an outstanding mortgage of just over 90 000 and he has no investment dollars built up he's not begun saving yet he's paid off a lot of debt he has a lot of equity in his home melissa has doubled that mortgage amount she has a hundred and eighty-four thousand dollars of outstanding mortgage but because she started adding to her army of dollar bills she has built up almost and two thousand dollars of investable assets so why did we choose 43 um to show this because this is a point that i see in our comments section on youtube and i'm like guys you're missing the big point and there's two stories i have to share on this first i think i've told you guys from my sunday school class i had a widow come up to me and said please please please make sure you share on your show that paying off all the debt is not always the greatest thing because she her husband passed away she still had kids in the house she everybody told her go pay off your mortgage so you'll be you know you'll at least own the house and everything's okay well the problem is she did that and then she did have money to cover a lot of the education needs a lot of the other stuff she says was some of the worst advice she was given but everybody was well intentioned saying get out of debt as soon as possible well i see this and i think about i immediately thought about my childhood and but we even have an article to pull up this you can see this is june of 1988 my world changed in life okay and what happened was my dad started working for this um mckesson back right out of college and he did that for 20 plus years and then at age 43 mckesson decided to get out of that division and he was out of a job and i mean life was completely different we lost company cars um we were living off my mom's teacher's salary now here's the here's what's crazy now i can't imagine being a parent us kids we thought these were the this was the greatest summer there was because dad was home he was home he was home for that period while he was finding another job but it showed me and this is one of the reasons why i always want to be self-employed this is one of the reasons why i realize you have to be careful if you give 20 years to a company that doesn't really give you a path forward you could get yourself in a pickle of a situation but it goes even further what if paul and melissa ten years into this mortgage their their dream house they loving where they are but all of a sudden they realize oh my goodness i've still got to pay the mortgage on this house even paul who's five years from the house being paid off only owes 90 000 he still owes 90 000 it's not like the mortgage company goes man you've done a great job of building up equity so we're going to be in this with you and protect you they're going to be like hot diggity dog this guy's about to lose the house look at all the equity we're going to take down that's what the bank is thinking i hate to be mean like that whereas at least melissa will have liquid investment assets that she can use to pay mortgages used to pay her grocery bill used to pay utilities melissa's going to have options because she has liquidity behind her name even though we might think it's great to pay off this mortgage debt as soon as possible there's a time and a place and that's why i always ask you are you 45 and over if you're not goodness gracious get that army of dollar bills working for you take advantage of the compounding because remember 88 times over happens when you're 20. 23 times over happens when you're 30 by the time you're 40 years of age that drops down to seven so you can quickly see 20 30. those are the years where you're getting maximum compounding growth for your army of dollar bills don't take those years for granted yeah i think and we see this riddled all through our comments people say you know what no no it's going to be safer it's going to be better if i pay off my house sooner because then if i lose my job remember paul has actually saddled himself with a sixteen hundred dollar a month payment if he loses his job just like you said it doesn't matter how much equity he has built up he has to make sure that next month he can come up with that sixteen hundred and if he doesn't get another job the next month the next month the next month so the question we asked is if you were these two individuals and 10 years into your mortgage you ran into a dire situation or an uncomfortable circumstance would you rather be paul who has 210 thousand dollars of equity in his home but no liquidity or would you rather be melissa who she doesn't have as much equity in her home yet but she has a hundred and two thousand dollars of liquid investments that she can help bridge the gap on realize when we talk about housing equity real estate's awesome but it's considered non-liquid it takes think about all the different steps that require to get your money out of your house and a lot of you're like well just go get a home equity line no remember i've fallen into that trap i've shared with you guys when we went through the great recession i had six figures of home equity in my house down in georgia had zero cash because i was like why would i need cash i have a checkbook i have all this equity i have six figures of equity until the day you don't because the bank very quickly can send you a letter saying hey that access to equity you thought you had we're shutting it down it no longer exists and i think we even heard somewhere in the chat room somebody had mentioned that they were starting to freeze home equipment equity lines and other things so bad things tend to happen at one together it's so there's a chance you'll lose your job but also real estate market will be struggling so you can't go sell it and turn that money into liquidity so it's good to have options so we know that uh personal finance is 80 behavioral right what we love about what we do get to do for a living is that there is math and science to it but there's also an art to it we're not trying to suggest that there's only one right way to build financial independence there's not only one way to get to financial abundance however our charge as your team is to show you the optimal way to do that the optimal solution so if you're someone sitting out there and you're like man i wish that my money had an instruction manual i wish i knew the steps that i should follow and maybe you just stumbled onto us right now in this live stream you are in luck because we are literally hours away from our pre-launch for the financial order of operations course going live this is your last chance in the next 24 hours your last chance to get the discounted rate on the course instead of going up to the full price of 249 dollars it's still priced right now for 199 and if you order before tomorrow before the before the pre-launch closes you get a money guy tumbler with your purchase you cannot buy these things only well we can buy them you can't buy them the only way that you can buy them is if you win them on one of our shows or if you're part of our early pre-launch team if you've not gone out there and checked out the the financial order of operations free deliverable go to moneyguy.com resources this is available out there for you for free go out there print it put it on your refrigerator put it on your bathroom mirror make sure you're doing what you need to be doing with every dollar and if you want to take it a step further go to learn.moneyguy and check out the financial order of operations course wow bo you hit them hard i did them pretty hard on the plug there so here's the thing i do want to tell everybody on those tumblers we sold out and we've actually it's kind of crazy we um we have ordered more i saw the approval come through just this morning ruby i saw you approved the the proof so they will be here within the week and then we'll get out so if you get the order in on the time you know for the course before the september 30th deadline um we'll make sure we get the tumblr i love in the private facebook group yep all the pictures everybody's posting i love how people are sharing about right we even had a show meeting this morning where we we're going to come up with some content to kind of address some of those questions and other things that are going on out there in the facebook group yeah what's beautiful is uh in in this live q a we're asking you guys to ask us questions we want to load you up with answers we're going to we're about to go through some questions and we're going to load you up what's great is in the private facebook group it's it's an extended version of that where we can go a little bit deeper have a little bit more involved questions be a little more specific in the things that we say so we are so so stoked that we get to do that so if you haven't gone out and joined that private facebook group only way to get access is to be a member of the foo course and then you get access and we're gonna do some really really fun stuff in there um all right let's answer some questions you wanna do that let's hit them all right so here's the first one this question is from kevin and this is one where there's a little bit of dissension amongst the two of us right so we're gonna start with a little bit of controversy this is what kevin says as we are living and working longer is it really that crazy to be aggressive in retirement accounts until 40ish if i'm revisiting revisiting it periodically so i think that this is what kevin's asking our opinion isn't my opinion is and always has been that when you're just starting out you should really only focus on figuring out two things number one how much can i save that should be the big thing you focus on how many soldiers can i be adding to my army of dollar bills the second thing that you can figure out is when do i want to retire if you can answer those two questions when you're first starting out the financial world has made it so so easy for you to build your army of dollar bills by utilizing target retirement funds the way your target retirement fund works is you pick the year that you want to retire and you just go buy that fund we are pro we prefer the index version of those funds well what happens is right now while you're far away from retirement it's going to be more aggressive it's going to have a higher stock allocation and a lower fixed income or risk off allocation well then as you move through time and get closer and closer and closer to retirement there's a glide path where it naturally gets more conservative for you we think that these funds are incredible solutions up until your assets hit that critical mass of like 400 500 000 and then you can benefit from a more sophisticated well thought out allocation well there's been some question of young folks saying yeah okay i might do that target retirement fund and it's going to have yeah it's going to be aggressive but it's still going to have some bonds and it's still going to have some risk off assets should i really do that if i'm in my 20s or 30s or should i just go all index all the time should i just go buy the s p or buy the international index or fill in the blank is it really okay and this is kevin's question if i do the aggressive thing up until i get to he picked 40 because i guess that's arbitrarily the age of is it okay if i do that if i'm making sure i keep an eye on it you and i have kind of had debates on this bo it's because um there's a part of me that feels like 20 year olds you could probably get away with just doing a total market index you'd probably be fine but you've you've kind of come back at me pretty hard and i'm willing to concede a little bit that it probably because there's just so many areas you can screw it up by just going all target market fund i mean total market fund versus going ahead and doing the the total i mean the the the total market if you do the total market index versus the index you know the whole target retirement fund i i think i i'm with you you've kind of persuaded me and that's probably why i'm stammering and and all over the places because i just think that the target retirement funds especially the index varieties they give you all the benefits of the index but they don't let you screw it up over there and here's i want to go ahead and tell you as a soon to be i'm in my upper 40s so i'm i'm officially older you're still aggressive yeah i mean i think if you go look at matter of fact if you saw the downturn that happened with covid previously around march there's actually a lot of articles is were the target retirement funds too aggressive because they didn't weather it as as much as people had hoped right and that's why i think there does come a point i think while you're in your 20s these things are naturally aggressive while you're in your 20s and 30s yeah you could still be a target retirement index fund but then know that you will reach a level of sophistication that you're going to harvest losses you're going to want to be able to look at asset location you know what investments go into retirement accounts because they're taxed differently than your long-term capital gains in your taxable account and then you're roth tax-free there's ways you can exploit in a legal way taking advantage of that plus you want to get creative with your charitable giving and it later as you get more sophisticated and naturally more complicated so all those things can be answered but i would you know i think i wavered on that i thought about giving an exemption i even think i've said it on a show for 20 year olds to take the total market index but i'm back to thinking the target retirement funds index variety are superior i think in most circumstances when uh when you circle up and end up re-agreeing with me then we've all ended up where we want to be right i think that's the way that works did you hear all i had to stimulate i was really i mean my brain was like no don't go there don't go there you don't want to agree with this guy all right i'm going to ask i'm going to answer another question now now this is from andrew andrew i'm not sure if you're trying to catch us here because this feels like a troll question but i'm gonna bite so here we come this is what andrew said if you'd already paid off your house by age 43 would you advise taking out a new mortgage to invest the rest in the market i think he's trying to get us yeah i think he's trying to get us uh andrew here's the answer absolutely not no we would not recommend doing that because the most valuable resource that you have when you're in your 20s and 30s is time unfortunately when you're 43 if you've already paid off your house you can't go back and get that 88 time multiplier you can't go back and get that 23 time multiplier and no you don't want to take on more risk than is already there so if you're someone who's 43 years old and you've already paid off your house that's great remember art science optimization just because you potentially have not optimized something in the past does not mean that you should jump in your time machine and try to go back and re-optimize it oftentimes you can't do that it's like folks who oh you know i've picked a college major but i've been working in this career for 15 years i'm gonna go back to college and do a redo maybe it doesn't always work that way no we would never recommend cashing out your mortgage and going and investing those dollars well also i mean think about this real estate transactions are so expensive i mean andrew even if you do this think about even if you go refinance i mean there's a lot of reason to go look at refinancing with interest rates as low as they are right now if you still have outstanding debt but there's still going to be several thousand dollars worth of closing costs so that in addition to the fact that you can't go recapture the loss opportunity costs from your youth in the the years that you should have been building your army of dollar bills you also don't want to go and curl the the state stamps the recording fees the attorney's fees the title insurance all the things that go into a real estate closing that just make it outright expensive it it doesn't work so i mean that is i think andrew is trying to catch us on that but i will tell you i don't like it i mean if you've made the mistake you're just there you just kind of have done it i wouldn't call it even a mistake i would just say if you took an optimization optimal road that's okay at 43 now here's what i will say if you're 43 and you got a paid for house but your retirement portfolio is looking anemic and you have not built those assets boy you got to be busy because you're going to have to work so much harder to build that army of dollar bills than your 20 year old self would have it's not impossible you still got plenty of time your dollars can still turn over seven times or at 43 it's a slightly smaller number by the way if you want to know what that number is go out to moneyguy.com resources look up the power of the power uh how powerful are your dollars thank you rebecca we really got a real name it will actually walk you through at every age how powerful every dollar that you put in your army of dollar bills can be so andrew if you've not gone to look at that go check it out get to saving get to building and your 60 year old self will absolutely thank your 43 year old self i do think that is a key point bo is that by the time you're 43 you should be i mean if you're a good income and the type of income that you could pay off your house that early hopefully they're approaching seven figures of of investigable assets and that's the that's the thing i would question if you are like we had paul in our analysis who was 43 he had zero investments but had all this home equity if andrew's like that that's a tough situation now andrew might be because look even in financial order of operations we talk about if you're saving 25 percent for the future and you still have extra money after you've gone through the entire cycle and you're on step nine i'm not gonna fight you if you pay your house off early i do have this debate with clients all the time because you're in a high income situation you have lots of resources coming in there's there is nothing wrong with splitting the difference because it's not like you're jeopardizing your retirement if you're saving 25 for the future and you still have additional resources and you've taken care of the kids college yeah you'll pay down the low interest debt i'm not going to fight you on that um do you do you agree with that or because sometimes you pick on me i i i i don't disagree with you however if i have a strategy where i want to prepay low interest debt we're talking about step number nine the last step in the financial order of operations if it were me and i were going to do that rather than prepaying that actual debt because i'm good at math it's a curse what can i do i know that i can go satisfy low interest debt at like two and a half three three and a quarter percent or i could go invest those dollars at six seven eight percent long term if it were me and i were gonna prepay rather than actually paying it on the mortgage i would build those dollars elsewhere get my pot of money big enough that if i wanted to just write a check to pay off the mortgage i could you you did this to me back and i did yeah i did i did this exactly with me and it worked i mean i give you credit i'm glad every additional contribution i made from march until now it's looking good has served has done well i'm so glad i didn't put more on the mortgage on that uh here's a really by the way that was a great question here's a really good one from joshua la selva and this is one i don't think that we've talked about a ton recently he said what percentage of my 401k should have my own company's stock in it i've read that it should be no more than five to ten percent but what if i work for a good company example disney all right so what if i work for a company that i believe in and what if i work for a company that i love how much of my 401k should have my own company stock well joshua here's what you have to remember most folks when they work for a company think they work for a good one i mean by and large people don't think man i really work for these turkeys wouldn't touch their stock with a 10-foot pole i mean obviously if you felt that way you might not work there what we don't recognize though is that sometimes companies that we think are amazing may not be as amazing as we think or perhaps there's a shift that might be outside of our control that might shift the sands of financial well-being well what you don't want to do is be in a situation where all of your human capital is tied to this company meaning it's where your paycheck comes from it's where your livelihood comes from and something goes bad and maybe there's a global pandemic and the thing that you work for can't open or whatever and there have to be massive layoffs or fill in the blank well not only is your human capital at risk but if all of your financial capital is also tied in with that same company now the thing that you need to be your safety net has also become depressed so you could get a double whammy that's why we do feel like whenever you do work for like a publicly traded company that five to ten percent number is a really good number to try to adhere to not just in your 401k but especially if you're someone who gets rsu's it participates in an employee stock purchase plan gets options gets performance units if you have that sort of compensation coming in you need to think through okay how am i making sure to control my exposure to my company in a tax efficient way through time because we see it all the time someone says hey you know i woke up and i was a millionaire today but 990 thousand dollars of it is in my company stock it's a great place to be but it's also an aggressive risky place to be so we like the five to ten percent number if you can control it that way yeah and i think that a lot of people who work for good companies like that that do have in addition to the 401k they probably do have access to that employee stock purchase plan where they get discounted shares you have to take advantage of those things i mean don't don't mishear us and think that we don't want you to take advantage of those guaranteed returns that some of these plans that these really good companies offer it's just you need to have a plan like beau said on how you're getting out how you're essentially turning it over every year still capturing the the free money that they're giving you just like employer match on your 401k employee stock purchase plans can have free money with the the way they give you discounts on the shares take advantage of all that stuff but do not forget you don't want to have your human capital tied to where your your working capital is and you know because the financial working capital need to have some separation so that if this goes ugly you've got this to live off of and that's the big part and i can tell you from my own experience i worked with a lot of lucent executives you know a lot of you great younger folks are probably like who's losers well if you go and google it this was a huge company back in the day i mean back in the the before we had the dot-com bubble um all the executives were multiple sub-figures but the problem was it was tied into the company because back then realized before the dot-com bubble there was all kind of incentives to have company stock in your retirement plans and every you've kind of had all your employees tied up into your company completely and um it went to nothing i mean i watched these people go from being mega wealthy seven figure portfolios to losing it all do not want to get in that situation for yourself all right give me permission to go on a really nerdy really deep like two-minute sidebar okay okay so suppose you're someone out there listening and you say you know what these guys are right i you know i've been working for this company for 30 years and i've been buying my company stock and i wanna it's all in my 401k and i'm gonna trim it down to five to ten percent because that's what the money guys said to do pause for a second one of the things that you need to recognize if you do work for a company and inside of your 401k you hold your company stock there's a really unique tax thing that you can do called net unrealized appreciation it is advanced and it is complicated what's so funny is you know we we're fee only financial advisors by day so a lot of you guys reach out and say hey i'm thinking about working with you guys or hiring you i don't know what's been in the water but i've probably had four nua conversations like the last two months but essentially what it says is there a special tax treatment that you can use if you have company stock inside of your 401k where you can potentially upon retirement turn those dollars from ordinary income dollars into long-term capital gain dollars so think like 25 30 percent tax rate down to like 15 tax rates yeah it's awesome it's just something you need to be aware of if you want to go do some googling go google net unrealized appreciation don't just go in and fire sell all of your company stock if you've built building it up over years and decades because there may be a really really exciting planning opportunity that you can take advantage of yeah it's essentially a way you turn something that's a little scary into a very positive event that's exactly right great great question josh hope we didn't go too many different directions all right let's do let's do another one uh this is from a good buddy of mine this is from charles uh charles lemay he said hey money guy i get nervous when you do it i read through it i read through it first to make sure no calculus was involved i'm not so sure we're the smartest person in the room when charles is asking this question the dude is wicked all right uh how would you examine the various mutual funds in your 401k what would you look for to different differentiate the good from the poor funds this is a great question because you may be surprised to learn not all 401ks are created equal some 401ks are really really good some 401ks are less than optimal so what are some of the things that you can look for to know if you have a good plan or not a good plan or good options not a good options the very first thing we like to see whenever we look inside a 401k plan is is there a wide berth of cost index options if i want to just go buy the s p 500 or i want to go buy the total stock market index or i want to go buy an international index is there a good really low cost option in there when i say low cost i'm talking like less than 20 basis points look at those internal basis points go look at the internal expenses now here's one thing to recognize and we've seen this with clients before we had a client one time and said hey no don't worry my 401k is awesome i got vanguard funds they're amazing it was an insurance provided that's a retirement plan we went and looked at it and there were sub-account funds that were managed to mimic the vanguard funds but the internal operating expenses were like point nine one percent of them were over one percent that's not what you think of when you think of vanguard funds so make sure you look at the internal expense ratio of the funds inside of your plan the other thing that we look for inside of a really good 401k plan is how diverse are the options you may have five funds but if it's large growth and growth opportunities and go get me some growth and i want some more growth and then let's have growth and income there's a chance that all five of those funds are actually buying the exact same underlying stocks you want to make sure that you're actually able to diversify your 401k well across a broad range of asset classes so if you don't have a number of asset classes represented you may have a pretty concentrated 401 k so that's something you can ask hr about but understand that just because you're buying something that has a different name doesn't mean you're buying something different again we've seen this with friend friends of the family and of the show who they just bought the stuff that said growth not realizing that the four funds they were using all bought the exact same thing they had no real diversification at all the other thing that we like to look for we're looking at a 401k now this isn't this isn't always the case but we like funds that you can go do your own internal research on so i like to look in a 401k and if i can find the ticker for that fund i think can then go to morningstar or yahoo finance or cnn money or fill in your blank and i can i can actually search that fund if the funds that you're using don't have tickers there's a chance it's still a really good fun it's just a pulled investment for the 401k or there's a chance that it's some sort of sub account that is wrapped up and it's not actually what you think you're getting so where we can do our own external research outside of the 401k plan we really like that i also would add look at pay attention to your 401k option or the plan design options meaning does it have roth i mean that is such a huge planning opportunity if you're if you're 401k or your employer provided 403b um is a roth plan as well so that you can have some tax-free savings also you know make sure that it doesn't allow after tax i mean we see all kind of planning opportunities where you could you know do mega back door roth with the right structure if they allow in-service distributions there's all kind of cool plan designs that can be set up for you that you can that will help you have the tools to maximize your retirement building this is the last thing that i'll say and i always get nervous when i say this kind of stuff because generally i tell people hey when you go select your funds don't look at the performance because our human behavior is naturally going to allow us to most likely say oh that funded really well last time put all my money in that one and then next year oh that fun and you chase but you do want to look at some sort of consistency on returns if you go see a fund in your 401k and last year it was up 50 and this year it's down 42 and next year it's up 13 and the next year it's down 12 if you're gonna buy that fund you better understand why you're buying that fund and what purpose that it serves in your portfolio so i would look for some sort of consistent track record are your fixed income funds acting like fixed income are your large cap funds actually tracking a large cap index are the international funds doing what international funds do just make sure you do a little bit of research if you're going to design your own portfolio now if you're someone in a 401k that has access to target retirement funds and your assets aren't over that 400 500 000 level make it easy on yourself just go do the target retirement fund focus on how much can i save when do i want to retire make sure they're the index varieties like the vanguard target retirement or the fidelity freedom index those are those are the ones we're talking about perfect awesome i'm going to do one more question this one's only going to take less than a minute and uh because just because we get asked this a lot this is from tim when you say your rule of thumb for housing expenses is 25 of gross income what expenses do you include if you haven't been listening for a while we say when it comes to affordability you don't want your cost of housing to exceed 25 percent of your gross income when we're talking about cost of housing we're really talking about principal interest taxes and insurance that's what we most often mean now if you want to be conservative if you want to make sure that you're structuring your plan to set yourself up for long-term success you can include other costs in there like utilities or like ongoing maintenance and that sort of thing but when we're talking about our 25 rule of thumb we're really talking about p-i-t-i principal interest taxes insurance i like the p-i-t-i p-i-t-i that's what i learned you sure you don't want let's do one more do one more let me find one that one was two you can't go out on something that that short okay um all right this is from tim and it's it's housing related so we'll use this one again if you're planning on retiring early and you're already investing 25 okay is it okay to start attacking the house prior to the 40 to 50 that you usually recommend so you say brian at 45 prepaid house before that don't do it he says what if i'm already a step niner what if i'm already there on the foo this is where bo and i probably disagree because i can go ahead and summarize for each of us yep as i would who asked this question this is from tim see i would give tim permission to yes if he's already on step nine he's already pre-funded the 25 taking care of all the college savings and things like that yeah knock it out go go destroy it i know what you're gonna say though you're gonna say why wouldn't you invest wait until it gets to that level of assets and then sell it and then pay off the mortgage if if you so chose because here's what actually happens right no one ever does that so we see this all the time i'll tell a client hey look let's not pay the extra we'll just set up this account over here we'll start building and building and building a building and i'll track it and let's say that that account gets to like 250 000 i'll call the client and i'll be hey uh mr client miss client guess what your mortgage account is now above your mortgage balance you want me to go ahead and liquidate and send it to you so you pay it off they never say yes i was like no no let's just let it keep let's let it keep growing this thing's been working pretty well but you have the option to do that so my opinion is you can shift your goal shift your strategy if you're above that 25 savings but for me i'm going to opt for six seven eight percent growth versus two three percent debt retirement i still feel like that it's okay though if uh i mean because look there is something about building wealth but also keeping well by minimizing and mitigating risk as much as possible that's why i mean look i it's hard to explain because you know i pick on you bo and the fact that you still have the warriors mentality and then you're gonna get to be your 40s get a little more sentimental sure you realize oh my goodness all the complication i ever sought because i remember when i was in my 20s i used to do tax returns or review tax returns i'm like man this would be so cool to have all these k1s and have all this complications and then you get to you get to be in your late 40s and you're like how did my life get so financially complicated because it's just just things are coming from all directions you're going to crave simplicity and that's why i do say post 45 there is nothing wrong with wanting to pay down that debt i know this individual was under 45 so maybe it does lean more in your column of building the assets up but i think that just naturally by the time you're in your late 40s you're going to want to be debt free i mean look chris hagen chris hogan does who's chris chris hagan right that one you know in everyday millionaires talks about that the the millionaire pays their mortgage off in 10 years i've gone through this a gazillion times there that is a spot-on statistic but it's not their first house it's typically their third house and i know this you know from i've had i think millionaires unveiled i think those guys shared with me but also i know for my own behavior i mean is that i will have this house paid off very you know within 10 years easily and that that's the thing i just don't want 25 year old 30 year olds or 35 year olds to put that 10-year pressure on themselves when it just doesn't have the right context to to let them know what's actually right for their situation love it love it love it guys thank you thank you thank you so much for letting us come answer your questions letting us get to do this for a living it's the most fun thing in the world today is the last day other than tomorrow so it's like the second to last day for you to be part of the money guy financial order of operations course pre-launch discounted price so if you're someone out there that procrastinates and you're like oh no i'll tell them the prices because it's 250 on october 1st on october 1st it's 199 right now that's right it it really is going up it's going up this isn't like where you're shopping at kohl's no where everything's always on sale this thing's on sale right now that's it it's going up on october 1st and maybe you're someone who's been listening for a while and you're like ah guys i like the foo i feel like i have it down and now this question is for you emma because i saw you ask it why should i do it why should i do it well in addition to actually just getting the content let's work into the foo there are also homework and worksheets where we actually walk you through the modules in addition to that you get access to the private facebook group where it is just a bevy of financial mutants that think just like you do in their communicate we love seeing you guys interact we love seeing you actually connect and come up with different business ideas with something we noticed this morning which i thought was absolutely hilarious we're going to do some private q a sessions similar to this but a little bit deeper for the private facebook group and if you go ahead and order now before october 1st you get a tumblr as well and if that doesn't scream worth 200 bucks i don't know what does thank you thank you thank you guys we love you so much we are so so so thankful that we get to do this make sure you go out the website moneyguy.com aboundwealth.com reach out to us let us know you're there go check out the food course if you're watching on youtube and you have not subscribed make sure that you subscribe we are chasing down that six figure number uh and i heard a rumor that hitting the like button doesn't actually change the algorithm but it makes us feel really really good so if you would like to give us a little boost and let us have a great day make sure you hit the like button so that we know you're out there money guy team out

Channel: The Money Guy Show

Views: 42,600

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Id: 8jjbVK-u8CU

Length: 45min 25sec (2725 seconds)

Published: Tue Sep 29 2020