Let’s move on to Mark’s question. He says, “What do you all typically include in your 20 to 25 percent savings rate that you talk about? HSA contributions, especially if I’m investing it? Or what about 529 contributions? What all is included?”
Well, that’s a great question. Awesome. I’m going to answer very simply in broad strokes, and then I’ll let you fill in the details. We say that in order to be financially moving along in your financial journey, we want you to save 20 to 25 percent of your gross income for the future. I think that “for the future” is really where your question lies. When we’re talking about saving 25%, we’re talking about those future dollars that are going to provide for you later on. Those are the dollars that one day you are going to live off of. So, the things that would go into that bucket are like your 401k contributions, your after-tax brokerage, your Roth IRA, and those types of accounts that are going to be your money later on. If you’re investing in an HSA, I would even argue that HSA contributions could indeed fall into that 25 percent.
However, when it comes to things like 529s, again, this is my opinion. I’ll be curious to hear what you say. In my mind, that’s a prepaid future expense. My kids are going to go to college at some point in the future. I’m not really saving for myself; I’m saving for them. So, I think 529 contributions would not fall into the 20-25 percent. I’d be curious to know your thoughts on that. Then, what about your employer? If you’re getting money from them or if other people are giving you money, how does that factor in as well? The whole Financial Order of Operations is steps two through seven, which are part of the 20-25 percent. High-interest debt is the only outlier here that’s not really counting because you have to get that in order. I just don’t want you to miss the free money. But it is steps two through seven of the Financial Order of Operations. Go to moneyguy.com/resources if you want that free deliverable for yourself.
That’s what the 20 to 25 percent includes. HSA contributions? Yeah, sure, count that because there’s a good opportunity that could be a great retirement account, as we all know, unless you’re using it as a clearing account. That’s a good point. 529s are a footnote item. Exactly. There’s a reason I didn’t make it to step eight of the Financial Order of Operations. Talking about the 20-25 percent, that is where we’re freeing you from the 20-25 percent because you’re going beyond that to where you can start taking care of the kids’ college, you can start doing the nicer lifestyle choices, and you can eventually even move on to the low-paid, low-interest-rate mortgage and so forth. But a lot of people are surprised that 99 percent of the world’s population doesn’t know this component of ours because we’ve covered it a lot. The employer portion is something that we have so many highlights on. I want you to be encouraged to include your employer’s contributions as long as your household income is less than $200,000. I said household. Pay attention to that. The reason I have that threshold is that the further you move away from the social safety net of Social Security and other benefits, the more the responsibility falls on your shoulders to make sure you have the retirement and the discipline to build the wealth needed to sustain that. So, you’ve got to pay attention to that.
So above that threshold, don’t count employers below that threshold. Count it, and that’s probably going to make this a lot easier. We take some flack for the 25%, but look, if your employer is giving you six to eight percent, all of a sudden that number drops way below 20%. You can now really start thinking about, ‘Hey, maybe I’m closer to this goal that the fine, the money guy Show puts out there, then I really realize.’ But actually do the exercise of doing the math. When’s the last time you sat down? If you’re single, you know, do it yourself one night. If you’re married, do it with your household, your spouse, and y’all actually look at each of your incomes, what you’re saving, what you’re investing, figure out how much is a percentage of your household income you’re actually saving and investing for the future, so then you can create a roadmap to make sure if you’re not doing everything you should, what can we do tomorrow to get closer to that goal?
Let me ask you a specific question, Brian, because we get this all the time. Let’s say I’m someone, I’m saving 15%, but then I’m taking 10% of my gross income to prepay my mortgage. Yeah, you know, I’m taking that money, and I’m paying off my mortgage. Does that get to count towards my 25% if I’m only saving 15% for the future? This is gonna be a little controversial because I know a lot of people think prepaying your mortgage is just a way to add bonds to your portfolio because you’re minimizing, but I say no. Because the reason I say no is because I always think about, remember, this 20%, 25% are resources that are easy to get to if you needed to for either retirement one day, emergency, in the current environment that you live in. Mortgages, because as I’ve shared with you, bad news, they’re all extroverts. If you think about unemployment, you think about bad markets, you think about real estate dropping, all those things hang out together. They really are a gruesome group of people that have the life of the party, but they’re also horrible personalities to have hanging out together because when they come at the same time, it makes access to the equity in your house, if you have not paid off your house at 100%, you might get squeezed. And that’s the part that I always tell people. We have no problem with prepaying mortgage debt as long as you’re over the 25% saving investments, but you have to make sure you’ve actually sustained and built the foundation to create the wealth. Don’t move to keeping the wealth when you’re not even guaranteed or on the path to becoming that wealthy journey because I see all kinds of comments from 32-year-olds that are trying to pay off their house as fast they can. I even think because we all know Dave Ramsey loves a paid-for house, but a lot of you are doing Dave-ish because if you’re not saving and investing for the future because you just get so hopped up and excited because you paid off your credit cards, and now you’re hopped up and excited and want to tackle the next biggest debt, which is your mortgage, you might be screwing this up more than you realize by skipping out on the actual wealth-building component that creates the wealth that will sustain you in retirement.