6 Questions to Know If You’re Ready for Financial Independence

Six Questions for Financial Independence (0:06)

Brian: Six questions you should answer if you want to know if you’re ready for financial independence.

Bo: Brian, I am so excited to talk about this and I want to give you some credit because you told me this early on in my career. You said, “Bo, one of the most powerful tools that you have at your disposal is the voice inside your head. But often times that voice can be a little misleading or it can lead you down the wrong path. Then sometimes we have to reframe that voice. And sometimes we need to even engage with that voice. And what I love about this is we’re going to walk through these six questions that allow you to kind of zoom out, engage with that inner voice, and hopefully get down to the root of what are the things necessary for you to live a truly fulfilling financial life.”

Brian: I think it gets you outside of the quantitative, the math side of financial independence and retirement planning and really think about the qualitative or the why questions. So with that, let’s jump right in. What’s question number one, Bo?

Question 1: What Would Your Ideal Life Look Like? (1:00)

Bo: So, question number one that we want you to ask yourself is, what would your ideal life look like if money were no object? So, if there were not financial implications, how would you structure it? How would you define that? What would that life look like? And you may ask, okay, well, that’s a great question, but why does it matter? What’s unique? What’s significant about it?

Brian: Well, what I like about this is look, definitely the math is going to come into play, but it lets you really focus on what’s your why, because it’s easy to get stuck in, hey, it would have, should have, could have, or this is what I’m planning for. This lets you get outside of the everyday life and really think about what’s important to you.

Bo: Well, and it allows us to reframe the idea that money is nothing more than a tool that allows us to focus on the things that we want to focus on to achieve the goals that we have. Money itself, wealth itself, being rich itself is not the goal. It’s a means to the goals that we have. And so if we can reframe, okay, what’s our ideal life look like if money was, as Forrest Gump says, just one less thing. If we can reframe that, it’s going to allow us to more clearly pursue those things that really matter to us.

Brian: Yeah. And you know, we talked about in terms of, you can see right there on the slide is to start dreaming about what’s possible, not just what’s right in front of you. I still think just giving you old man perspective here. I think it’ll be interesting when you think about the why questions outside of money. You’re going to start thinking about family, friends. It’s the things that are outside of money. But now you ought to refocus that and say, “Okay, let’s turn this back to money is how do I get to do these things, the why or what’s important to me as much as possible so you can own your time that much sooner.”

Bo: I love it.

Question 2: What Would Change Without Financial Worries? (2:38)

Bo: All right, let’s talk about the second question. Here’s another question you can ask yourself to really kind of get those creative juices flowing. If you woke up tomorrow and your financial worries were completely gone, you didn’t have to worry about financing anymore, what would change? What would be different about your life tomorrow with no financial worries than today with financial worries?

Brian: Well, Bo, and we didn’t even talk about this, but you have a saying that we sometimes use is that if you have a problem, but you have money, you don’t really have a problem. And look and let me give clarification on that why this matters. A lot of us get caught up in our anxieties, our fears. And I’m often surprised at how many of us just wallow in it versus saying, “Hey, is there a solution?” And maybe even money is that tool that can help me overcome whatever fear I have from the past, the fear I’m worried about in the future, and what can I do today that will actually start moving me away from those things?

Bo: Yeah. And I think anxiety, not only does it cloud our judgment, does it change our priorities, it presents a false realization of what is actually going on. We end up thinking that things are worse than maybe they actually are. We think things might be more impossible to achieve than they really are. And if you can start thinking about this, what it will do is it will create a level of excitement that will be the motivating factor for you to do things like defer gratification and begin saving for tomorrow and not fall into some of the consumerism traps that a lot of people fall into. So again, if you can think through this, you’re going to set yourself up to not get lost in the messiness and the stickiness of today. All right, Brian, you want to go to the next question?

Question 3: The One Thing You Want to Experience (4:17)

Brian: Question number three. What’s the one thing you want to experience in life that you haven’t yet? Man, that’s kind of powerful because it’s basically saying, “Hey, write down something you value and want to do,” is essentially a bucket list type thing and let’s figure out how are we going to get there?

Bo: Yeah. Now, we went back and forth on this because I was like, “Guys, this says the one thing.” And I was like, “No, no, we should just write down some things that like why don’t we write down some things that you want to experience?” Like, no. I think the whole idea of this is if there were one thing that you wanted to experience, one thing that you could focus on, whatever that may be in your situation, your circumstance, maybe it’s starting a family, getting married, buying a house, going to see a different part of the world, achieving financial independence, whatever that thing is. If you can hone in on that one thing, it allows you to have a clarity of focus around the decisions that you’re making. So just focusing on that one singular event can be easier to focus on than the 400 different financial goals that you have. So if you can clearly ideate on what the most important goal is, it will allow you to begin taking steps towards that most important goal.

Brian: I also think this wakes up that invisible hand of your the quiet part of your brain that actually works behind the scenes. I think if you start thinking a goal-based planning of where you want to be, I think you’ll be surprised over time how things just start happening. It almost seems mystical, but it’s really just how powerful your brain is if you put it to work on things even when you’re sleeping.

Bo: Yep. I love it.

Question 4: What Would Your Future Self Thank You For? (5:53)

Bo: All right, next question. Question number four. Imagine your future self looking back. And somebody said, “Hey guys, these questions are so age dependent.” No, no, no. You can do this no matter where you are. Even if you are a retiree at age 65, think about your 85-year-old self looking back. But imagine your future self looking back. What financial decisions would that future person thank you for? And I think about this all the time, right? You know, when I first started working with you, it was like 2008 and I just I wanted to do a Roth IRA and so I was just doing 20 bucks a month or whatever it was. And I look back and I’m so thankful because now in hindsight, seeing what that small decision was able to turn into here decades later is pretty powerful. And I think we can constantly reassess, okay, what decisions will my future self be happy I made today?

Brian: Well, look, and we should give credit to where a lot of this stuff is coming from are questions that are from Michael Kitces’s website. And this one I feel like has a little bit of a money guy echo. It’s just he wrote it in a much more non-emotional way. I always ask this question in terms of what thing can you do right now that your 50-year-old version of yourself or 60-year-old version of yourself is going to give you a sloppy, slobbering bear hug excitement. Because seriously, that’s really what this question is getting to is what can you do today? Because recency bias is a real thing. Tell me how much easier it is to do something for today than it is to practice the discipline of deferred gratification for something that’s years in the future. It is hard to do. So doing an exercise like this can be very powerful.All right, Brian, you want to go to the next question?

Bo: And I think even if you want to flip it a little bit, you know, the question is imagine your future self. What financial decision, we think a lot of times it’s what financial decision did you not make that you are thankful for? Do you look back and say, “Oh man, you know what? I was going to buy that really expensive car because it looked super fancy and it went really fast and it was all cool, but man, I’m so glad I didn’t do that. And by foregoing that decision, it allowed me to do XYZ.” If you can think about those and think, man, 20 years from now, this thing that I want to do, this thing I want to spend money on or this choice I want to make, will it have long-term impacts or is it just going to be a moment flash in the pan right now that really may not be worth it? All right, Brian, you want to go to the next question?

Question 5: What Legacy Do You Want to Leave? (8:18)

Brian: Let’s jump into question five. All right. Number five. What legacy or impact do you want to leave behind?

Bo: So, this is such a powerful question because oftentimes we get so focused on attaining goals. Hey, I want to do this next thing. I want to achieve this next thing. I want to, but at some point we will get to the other end and we will look back and say, okay, what was this all for? What was the why? Is the life that I lived or the things that I do, was there purpose behind them? And if I were going to be able to write the ticket, write the story on that legacy, what would it look like?

Brian: Well, I think this does several things. It lets you have a purposeful life because you’re focusing on the why a little bit more. It’s funny how this all comes back full circle. It also, but I like that it really does help you get out of just the scarcity mindset because so many of you financial mutants were always doing stuff to live a little bit more for the future and stuff. But if you start thinking about in terms of, you know, if I can do it all or if I live my best life, that’s why I do love these framing questions. Get you out of that scarcity mindset and more thinking about abundance of living your best life, not only for the future, but also right now. And those things can really intersect.

Question 6: What’s One Change You Can Make Today? (9:36)

Bo: Well, I love it. And then this last question, Brian, I think this I don’t have favorites, but this one I think is such a good one because all these other questions were like out there sort of in the ether like you want to, you know, I want to have this zoom out big picture idea. This next one kind of brings it back and it is what’s one change? What’s one actual tactical change that you could make today that begins moving you toward all of those other visions? And this is so important because often times if we can break down these big huge hairy audacious goals into singular steps, say I just need to do this next best thing and then after that I’m going to do the next best thing. It allows us to begin to create momentum moving towards our financial goals.

Brian: This was kind of a sentimental thing for me is because as soon as I saw this question, it felt like another money guy echo and the fact that any of you guys and thank you thank you thank you for every one of you who showed up at all of our book events back last year when Millionaire Mission came out. If you came to that live event, you’ll remember we closed that event out with a key question. We basically were sharing what small decision are you making today that will help you build your great big beautiful tomorrow because that’s what I put in the book, a lot of my life experiences plus the financial order of operations and the origin story is that you’re going to see that there really is huge impacts from every little small thing you do. It has a ripple effect of something really great. It’s exponentially bigger just by doing a little bit of something just today.

Bo: I love this exercise because frankly life gets busy and even if you’re not in the messy middle, no matter what stage of your life, stage of life you’re in, there are often going to be things that are competing for your attention, competing for your priority. And so if you can zoom out and reframe these questions that actually matter, it’s just going to equip you to begin making decisions that ultimately move you towards your goals and not away from your goals. And what I love is that we get to sit in this spot and be part of that financial journey with you. So much so that every Tuesday at 10 a.m. we get to answer your questions. There are things that you are curious about that you want us to weigh in on and we love that we get to do that. So if you have a question, if you want to get our take on something, make sure you get it in the chat right now. We have the team out in the wings collecting your questions because we believe that there is a better way to do money. So, with that, creative director Rebie, I’m going to throw it over to you.

How to Invest Your HSA (12:02)

Rebie: Yeah, I’m going to kick it off with a question from Progressing Mutant. I like these self-reflective usernames, and I know you guys love the things you can do with an HSA, and this question is kind of getting into the nitty-gritty of how to actually do it. It says, “How do I invest my HSA? Can I invest the full amount and still have access to the funds if needed for medical expenses or do I have to make an assumption for how much to keep uninvested?” So, if he is thinking about using it for medical expenses, can he still invest it? What does that actually look like?

Brian: Bo, I’ll set this up for you. Is that I think that, and by the way, if you’re curious on how much we love health savings accounts, if you go download, if you go to moneyguy.com/resources, you can download this for free. Step number five of the financial order of operations is maxing out those tax-free opportunities, which is your Roth accounts, your health savings accounts. And what I think is interesting, but this is why Progressing Mutant has a great question here, is that when you get to maximizing that strategy that you’re trying to become the 4% that is actually the financial mutant way of actually investing the health savings account so you can exponentially let it grow. It is going to fall into some divide and conquer on the goals purpose, Bo, is that because a portion needs to probably be liquid to cover medical emergencies and other things, but then the other part is you’re thinking long term. How should somebody kind of make that decision process?

Bo: Yeah. I’ll tell you the way that I did it. I’ll share sort of my experience. When I first began using an HSA when I was first starting out in my career in my wealth building journey, one of the things I did is I knew I wanted to take advantage of this health savings account, but I thought there, hey, there’s an opportunity. I might actually need this money. There might something might come up. There might be a cost that I incur. So, what I said is, okay, I’m going to look at my health insurance and I’m going to determine what my deductible is. I already know if I’m following the financial order of operations. Step one is highest deductible covered. Well, specifically, I want to know what my health insurance deductible is. Is it $1,000, $1,500, $2,000, whatever. Whatever that number is. If I think there’s a chance I’m going to use my HSA for medical expenses, I might want to leave just the amount of my deductible in cash readily available. So, if it’s $2,000, I’ll leave $2,000 in my HSA right there. And then I’ll begin investing all the rest of the contributions I put in there so that they can be triple tax advantage. Now, what happens is as you begin to move through your financial life and as you have a fully funded emergency reserve and you’re beginning to build your other assets up, you might arrive at the conclusion, you know what, I’ve got my emergency fund and I’ve been saving and I’ve got some discretionary cash flow. There’s a really good chance I’m not actually going to have to use the HSA. And once you reach that tipping point where you say, “I’m not actually going to have to use these dollars. I have other sources where I can pay for medical expenses,” then I think you can actually fully invest your HSA. You don’t have to leave that cash cushion there. But if there’s a chance that you might have to dip into it, you don’t want it to be invested because the worst thing that could happen is you invest all those dollars and then something squirrely happens, the economy goes down, the stock market goes down, and at the moment when you need them the most, if your HSA is down, well, now you’ve kind of shot yourself in the foot that you have to go sell assets, pull money out at depressed prices, you really did not take advantage of the growth opportunity there.

Brian: So, basically, if we’re going through the mental exercise of what you have to do is figure out how much needs to be protected money you need to get. And then when you actually think about the investing for the long term, I mean, I love index funds. I mean, that’s what I do in my health savings accounts on that part that I feel like can be for the long term. And by the way, remember when you’re trying to figure out long-term mindset is that’s money that you’re not going to touch for five to seven years so that you don’t have any type of concern that you need to sell assets at the world’s worst time. Another variable that I just need people to understand because I agree with Bo completely is that the deductible or the high deductible point within your insurance is very powerful. But there is one other data point you ought to at least know the number and that is your out-of-pocket maximum because remember this is a step five of the financial order of operations. You still have the backing of your full emergency reserves. Then you just ought to know what the spread is between your deductible and what is the peak maximum amount that you might have to come out of pocket for that year if there was something catastrophic just so you can make sure or at least go through the exercise of knowing you got that covered too. Very small likelihood that it will happen, but you at least ought to know what that number is so you can have a mental plan for how you’d have access.

Bo: Love it.

Rebie: Well, Progressing Mutant, thank you for that question. And it is your lucky day because today is a tumbler day. So, if we answer your question on the show today, then you can win a tumbler, which also transforms into a koozie if you would rather.

The Role of Dividends in Your Portfolio (17:40)

Rebie: Matt C’s question is up next. What role should dividends play in a well-rounded portfolio? I’m 44 with about $1.5 million of investable assets and $450K a year of income, big income. Should I prioritize dividend stocks? If so, how? And I might go so far as to say, can you just clarify what dividend stocks are for the newer financial mutants?

Bo: Yeah. Can I start with a little bit of I’m going to just do a little vocabulary investment 101 stuff here. So oftentimes when you buy a share of stock in a company, the company will say, “Hey, we had some sort of profit that was generated this year, and rather than deploying that profit into the company to expand, we want to pay it out to our owners. We want to make an owner’s distribution out to the people that own our stock and that’s called a dividend distribution.” What a lot of people don’t realize is that when you invest there are actually two components of return that matter. There is the income component which is the dividend or the interest or the coupon that you receive. And there’s this other component called capital appreciation. It’s the idea that if I buy something for $10 and then it goes up to $12, I’ve had $2 worth of capital appreciation. And so Matt’s question is, hey, where does dividend investing play into it? When we think about portfolio construction and investment management and how we allocate returns and how we pursue that, we don’t like to bifurcate between those two. We don’t think about, okay, what’s our dividend return versus what’s our capital appreciation return. What we ultimately care about is total return. When we look at the total value returned on the dollars that you’re investing, what does that look like and how is that manifested across the capital appreciation component as well as the income component? A lot of people get so excited about dividend investing. Like, oh my goodness, look, I’ve got this 3%, 4% dividend yield that I’m getting on this stock and it’s amazing. And I’ll say to them, hey, that’s wonderful, but if you could have a 4% dividend or a 10% rate of return, like which would you choose? Right? Obviously, you would choose the higher one. As an investor, you don’t really care where your return comes from if you’re not living off of those dollars. Like some people they have dividends pay and that’s their income stream. That’s a different thing than what Matt’s talking about because Matt’s just an investor in the accumulation phase. So when I think about how dividend investing plays in, it’s part of it, but in my mind, it’s not a singular focus. The singular focus ought to be on the big picture. What’s my overall asset allocation? Where am I at on the risk spectrum? And what types of investments am I buying to allow me to pursue that level of risk inside my portfolio?

Brian: Look, I look at this as a feature versus it being the goal. And so much in social media. And I see this all the time. And let me give you another example so you can get your mindset to know what I’m talking about and not think I’m just singling out dividend investing is I see people all the time pay off their credit card debt. It feels so good to pay off the credit card debt. They become what’s known as debt crusaders and they start paying off even low interest debt. Whereas they lost the focus of thinking about what the ultimate goal of how to use the tool of money is because they got enamored with a feature of something that money can do. And that’s what debt crusaders do. Dividend investors because I see it all the time where people who are in their 30s will be like this year I’ve got $6,500 of dividends coming into me. I’m close to being able to 25% of getting all of my life covered through dividend investing. Do you see how people when that’s your focus when you’re saying, “Hey, I got $6,500. I’m just trying to replace like $40,000.” You have now made the goal of this income, which should be just a feature because that’s going to preclude you. And Bo, I saw I hate to pick on you. Back when you first started investing…Oh, yeah. Bo you’ve told me the story. There was a software company that had like an 11% dividend yield because if you start focusing on the feature and that becomes the goal, you might go and you try to get higher dividends, you don’t care about the financial foundation of these companies, you’re just chasing yield, whereas you might be much better served and this is what Bo was getting to if it was just a component of a total return portfolio. Meaning that, and that’s what we do for clients when they’re retired. Yes, dividends are a component that we will take into account on somebody’s cash flow management plan, but we’re still looking at it in total with how much appreciation do we need to go sell equities as we’re replenishing these safe or risk off type assets that we’re using for our retirees. It’s all part, it’s a component of a total portfolio plan instead of just getting so enamored with the shininess and the coolness that, hey, maybe I’ll have, you know, $40,000 worth of dividend income coming in. Because here’s the other problem with if you focus on just this feature, it’s kind of inefficient. I mean, there’s a reason Berkshire Hathaway doesn’t issue dividends. I mean, it just doesn’t. Now, look, it has dividends coming in, you know, when you read Uncle Warren’s annual report, he shares how much he’s got coming in from all the different companies, but a lot of times, you know, dividends are still double taxed. So, for a company, it’s much better use to let them go and innovate and expand versus, you know, paying income taxes and then sending that out to your investors and then they have to pay income tax on it. It’s got a double taxation component to it. That’s why don’t let it, you’re going to get dividends but don’t let it be the driving factor of your financial decision-making.

Bo: I think Warren, I think it was in one of his letters to shareholders he said hey here’s a reason why we don’t pay dividends. When you pay a dividend you’re making an assessment that who can manage, who can allocate this capital better, the company in which it’s operating or the shareholder who’s outside of the company. Like who can use that? He says right now we believe that we can deliver the most value to our shareholders by retaining those profits and reinvesting as opposed to paying them out as dividends. If we ever believe that we will not be able to achieve a superior rate of return relative to what our stockholders can do on their own then we’ll issue a dividend and so I think it’s a great way to think about it.

Brian: Well think about the maturity of a company. I mean when you see when Microsoft started issuing dividends, when Apple started issuing dividends, this is a maturity level within the company but where was the exponential growth that we all get excited and get in a frenzy about? It’s usually during that innovative state. That’s why let it be a component of a complete overall plan. This is just a feature of it versus because you would miss out on if you were just chasing yield, you might miss out on the next latest greatest thing that’s built into the S&P 500 as AI and all this innovation is going on. And that’s why I would just don’t get distracted. That’s probably the best way by dividend investing.

Bo: Love it. Great.

Rebie: Well, Matt C, thank you for your question. Just email [email protected] if you would like to cash in on your money tumbler since we chose your question today.

Balancing Life Expenses with Investment Goals (24:59)

Rebie: Aaron H has a question for you. All right. Ready for Erin’s question? It says, “This year we have added many expenses or have many added expenses. We have a 25th wedding anniversary trip to Europe.” Congratulations. “Higher health care bills. We have to replace an old car with a better used vehicle. While it won’t cause us to use any of our emergency fund, it will impact investments for the year. How does one deal with a year where you want to invest, but due to life you need to scale back?”

Bo: Yeah, a lot of financial mutants really struggle with this. Like, hey man, guys, I had this amazing financial plan in place and man, I knew exactly what I was going to do with all these dollars, but then life happened, right? Like, oh, just these things happen. And so, I look at this list of stuff. All right, 25th anniversary to Europe. I mean, that’s a pretty big thing. Like, that’s not an insignificant thing. A lot of people, you know, 25 years doesn’t come around all that often. Only about once every 25 years. Health care costs, I mean, yeah, you have those, but like I imagine if your choice was to not have health care costs, you would have done that. So, that’s not really something you can change. And then auto replacement. If you have a car that’s kind of on its last leg and you’re at the place where you really need to replace a car and there’s different reasons you can do that, you can’t not make that decision. You have to. So, is it okay if I have to take a temporary pause if life happens and I need to redivert my invested or my allocated dollars that were going to go to savings and now I’ve got to fund like present day life. Is that okay? Absolutely. All the time people think that the path to financial independence is a straight line up. It’s not a straight line up. It’s actually it goes up a little bit and then it flatlines and it might even come down sometimes and it goes up and the FOO is the exact same way. So if you have to find, you have to put a pause on your savings plan on your savings strategy because of other life things that are happening, that’s okay. But I hear Brian counsel people on this all the time say hey yeah it’s okay but you got to be quick to get back. You can’t be gone too long.

Brian: Well, this is because Aaron said something in the way his question was written is he doesn’t have to touch his emergency funds, but it is going to impact his investing which was a mindset shift that I would challenge him to kind of reframe his perspective and the fact that there’s nothing wrong with your emergency fund essentially having a flexible component for syncing funds of upcoming things that you know are happening. And that’s where, you know, when you’re younger, it might be a three months emergency reserves, but as you get older, I mean, I see people my age all the time, you’re like, “Holy cow, you have close to 12 months worth of living expenses.” And it’s because these syncing funds are all built into the emergency reserves because you just know if I looked at your list a lot outside of the health care stuff. I mean, 25 year anniversary, you kind of know when your anniversary is. You know that you could take a few years to know, hey, 25 years is coming up, let’s do something big. Let’s start planning ahead for that new used car. The way you wrote it, it’s not like your cars are falling apart. It sounds like you just know that, hey, we’re getting to the point that maybe maintenance is getting to we need to go buy another used car. So, this is once again another planned expense. There’s nothing wrong with you creating more of a cash management plan that expands and contracts based upon those upcoming expenses so that you don’t have to gut your investment plan to where you’re investing with what’s left over versus paying yourself first and building this stuff into that actual investment plan. That’s the mindset that I would encourage you, Aaron, to shift is that way you’re not just waiting to see what’s left over after you’ve covered life. You’re actually building this stuff in. That’s a mindset, a mindful exercise is to change your perspective into just letting money and how it comes. You’re actually planning ahead to control it so that you kind of you get better results that way. You really do love it.

Rebie: Yep. Love that too. Erin, thank you for the question. We would love to send you a Money Guy tumbler that we also know you’ll love. Just email [email protected] to cash in on that.

Financial Independence Number vs. Net Worth (30:21)

Rebie: FlyinRyan has a question. FlyinRyan, can you explain the difference between my FI number, financial independence number, and my net worth number?

Bo: Yeah. A little definition talk. Okay, let’s define our terms. Well, here’s let’s say that you own a $1 million house and you have no debt on it and it is the only thing that you have. You have a $1 million net worth. I would argue if that’s all you have, you are not financially independent because you have no other mechanism or resources to be able to pay for your life. So while your net worth may be seven figures, you are not actually at financial independence. Your financial independence number is that number at which my total net worth, including all the different types of assets that I own are at a place where it can sustain my lifestyle without me having to work, without me having to go generate income with my brain, my back, and my hands. That’s how I would define the difference in net worth, financial independence.

Brian: No, I think you spot on nailed it is that how much of these assets can actually support your cash flow in retirement. And that’s why the Fred data, meaning the data coming out from the Federal Reserve when they release it and you get excited about seeing how much people’s net worth has increased, but then you go and you dive deeper into the data and you realize it was pretty much dollar for dollar increase by what their housing went up and you realize most Americans don’t actually have liquid net worth. They’re just by luck of draw they bought a house, it went up and they’re not saving. It’s an afterthought to save and build assets outside of what you do with your brain, your back, and your hands. And that’s the difference between, I think, the general population and financial mutants is we want to own our time that much sooner. And the quickest and fastest way to do that is to turn your labor into resources and assets that you can then own part of this ever-expanding economy. So you get to do what you want, when you want, and how you want without you actually having to do the work. And that’s the problem with the net worth is it doesn’t differentiate unless you know how to look at it. It might give you a false sense of hey I’m wealthy but it’s all tied up into the house that you’re counting on living in because that’s the problem. We live in an area that has appreciated significantly just like a lot of you guys do. But if I think about what I’d have to go, the house, if I sold this house I would have to go pay a fortune to replace that house if I wanted to stay in this area. So the house, it doesn’t generate value unless I moved. And that’s just not something that unless that’s part of your financial plan that you want, it’s not determining whether or not you’re financially independent and successful. That’s why it’s on you to go out there, take charge, build up those assets outside of your house and other use assets like your cars, your furniture because those things all show up on your net worth, your gun collection or your jewelry and all that stuff shows up, but it’s hard if you’re counting on that for retirement if you haven’t built up those assets.

Bo: And so one of the things we love is we love helping financial mutants, we even do shows on this, like track significant milestones and there are significant milestones you’ll hit along your journey. You know, one of those milestones might be a $100,000 net worth. That’s an amazing thing. But another milestone might be a $100,000 liquid net worth. So, you can do the same thing. You may hit millionaire status and that’s incredible. Or you may hit a million dollars of liquid net worth. That’s incredible. You’ll notice every time we do one of these milestone episodes, the one that we always end on and because we think it probably is the most important number is your financial independence number. It’s the number that allows you to live the life that you want on your terms, the way that you want to do it. And what you would maybe be surprised to hear is there are some people who are, we have clients that are actively financially independent and do not have million-dollar net worth but they are financially independent. And we have other clients who are decamillionaires but they are not at the place right now where they are financially independent. And so it’s a wide spectrum. That’s why personal finance is so so personal. So your net worth is a wonderful thing. We want you to track it every year, but it’s tracking your progress. Financial independence, you can think about that kind of like the finish line. That’s the horizon that the net worth is hopefully marching you towards.

Brian: Well done.

Rebie: Well done, FlyinRyan. I like the username and we’d love to send you a tumbler. Just email [email protected].

Pausing Retirement Savings to Buy a Car (35:01)

Rebie: Troy K’s question is up next. We need a new car for our growing family. If we pause retirement for 9 months, we can pay cash. Or should we follow 20/3/8 and keep saving? We hate car payments, but we want to know what you guys think. It’s a good messy middle question.

Brian: You know how old Troy is?

Rebie: He did not say, but Troy, if you’re out there, put it in the chat and we’ll let them know.

Bo: I think this would be a fun exercise for Troy. I want you to add up that nine months of retirement contributions that you are not going to save, right? Like you’re going to spend on a car, what you’re not going to save. And I want you to go to moneyguy.com/resources and I just want you to take that amount and I want you to put it in the wealth multiplier. And what you’re going to find, Troy, is that if you’re a young person, if you’re in your 20s or 30s, even your 40s, that nine months of not saving is going to be pretty substantial later on in life. I mean, what those dollars will turn into will be pretty significant. And so what you have to ask yourself is based on where I am in my financial journey, how much will that decision impact my future success? Now, there are some folks who, Troy, if you’ve been saving for a while and you’re well ahead of the curve and you have a big portfolio behind you and your dollars are working, the opportunity cost may not be significant. And you may choose, yeah, I’m going to save up and I’m going to pay cash for the car. But I’m willing to bet if you’re in a situation where having to actually stop your retirement savings, so to me that means like no 401(k) contributions, no Roth IRA contributions, no HSA contributions. If I’m going to stop those things, that’s going to be at a pretty significant and substantial cost. And one of the things we recognize is that life is expensive. We have these home buying rules about how expensive life is. That’s why we have the car buying rules. It’s why we have 20/3/8, so that you don’t have to make like these incredibly costly from an opportunity cost decisions to try to get into an automobile. And we do give you some flexibility so that you can pursue both of those goals simultaneously. You agree, disagree?

Brian: I mean, I think you’re spot on. But I want to give some context on mindset. Without a doubt, Troy, cash is the best thing to pay for a car. I mean, we love people paying cash. So that’s the extreme of what’s the best way to buy a car. But then there’s also this goal because we all have competing goals is that we need to build up as much assets that are working for us so we don’t have to work so hard ourselves. We want to own our time that much sooner and the best way to do that is to have investments. So you can see how these things are somewhat in conflict and this is what you find out in the personal of personal finance is we have goals that are in complete competition with each other. And this is why you get and if you go down some of these paths without moderation or balance, you understand why some people end up becoming debt crusaders because they focus on one feature or one thing while other people who hopefully we’re trying to create financial mutants where you do it all well. And you’re going to look at and you’re going to recognize these things are in complete conflict with each other. And there’s a risk that if I go all cash or I focus on this next nine months and I just go all in so I can pay cash for this vehicle, there is a risk that you create a behavior that just compounds meaning you don’t ever start back at saving and investing. The behavioral side of things is risky plus the actual opportunity cost of what those assets could have become. I always think about this and this is what I’ve done with my own life is I say okay is there a balance in between here where maybe for the next nine months I am going to be crazy in the fact that I’m going to go pick up a side hustle or I’m going to do something because I really do want to pay down as much of this car so I’m financing and so I go take on an extra shift or I work overtime or I go do this side hustle but I’m also going to get super creative with how I’m cutting my expenses and maybe yes I have to trim down my retirement but I’m not going below, you know, go to how much you should be saving by age if you go to moneyguy.com/resources. I always say what 25% can do, well thank you, let me get it right now. So if you actually look at where your age is because you didn’t give us your age, Troy, and you know, you find out where your back stop is. For somebody in their 20s, that might be 10 to 15%. Just try not to go below that, but if you’re somebody who’s now who’s reading this and you’re 40 and I would it would make me sick if you go below 25%. So, you need to have perspective and context because these things are in competition with each other. But, you have risk with either decision you make. So that’s why balance and knowing your why is going to really help you figure out the perfect Goldilocks recipe that brings in a financial plan.

Bo: This is exactly why I love what we do for a day job is we get to take the chaos kind of figure out which pieces we can move around and then come up with a balanced perspective that lets people come out better on the other side. And that’s why we try to give you that with the financial order of operations, the money guy show. But I know even for my keenest people who are financial mutants, your life is one day going to go from simple to super complex and we’re going to be waiting for you and leave the porch light on. Now, one thing I love, Charles, who’s a very good friend of the show in the chat, he just made a great point. He said, “Hey guys, I think one of the things you ought to mention is it’s probably even more important not how you pay for the car, but how much car you pay for, right?” And that’s a great point. If you were in a situation where you have to like back down your retirement savings for 9 months I would begin to reevaluate. Okay, am I buying a more expensive car than I should? Should I look at a used car? Should I think about change? That’s a great idea because even total cost of the car, that should be the thing you figure out first before you figure out how you pay for it. So that’s a great drop in that I think is worth Troy thinking through.

Rebie: Well, Troy gave you lots to think about. We really appreciate you being here and posing the questions so that we could discuss it. If you would like a Money Guy tumbler, just email [email protected].

Understanding the Social Safety Net (41:55)

Rebie: Mark says, “Can the guys clarify what they mean by the quote unquote social safety net when you make more than $200k? Do you lose some of the money you would get from social security at that income level or something?” Thanks.

Brian: Remains to be seen.

Bo: Yeah. Yeah. You could depending on your predictions on the future. But Brian, you talk about this all the time about the social safety net and why we have this little thing that okay, if I’m under $100,000 single or $200,000 I can include, but if I’m over, I can’t include. I’m getting further away. What’s that mean? What are you talking about?

Brian: Well, think about all the policy design things is that when you’re in a lower income situation, first of all, we have social security. That’s the common thing that’s out there. But there’s even on the way our tax code is written, the more money you make, the higher taxes you pay. And even things that were not taxable like social security become more taxable. Things like what you pay on Medicare in retirement, the premiums you pay is determined by how much income you’ve made in your earning history. So there’s a lot of things that will be influenced. And then Mark, the way your question was written is we talk policy makers. We don’t know what the future is, but I know that this country has a lot of obligations that’s probably going to require some pretty hard conversations on how we’re going to pay for it all. And at some point, they might means test even some of these social safety net things. And then here’s the bigger risk though, pull if you when in doubt zoom out is that when you have a big shovel meaning you make a big income and if you let your lifestyle expand to match what you actually are earning in income you will find that more and more of the responsibility for the future is going to fall on your shoulders because you’re going to have to have a pot of money that when all else comes to when you stop working with your back, your brain, and your hands. The more you spend, the bigger your pot better be. And that’s why we say for people who make a great income, you have to have a lot of money behind you. Whereas if you think about all of our teachers and others who don’t ever make a ton of money, but because of the pension that they get because of the social security and other things, they tend to not require you can have people who make who have a net worth less than a million dollars still be completely financially independent. It’s because they’re close to those cash flow replacers. Whereas somebody who makes $200,000, $300,000 a year, they better have a net worth much greater than $1 million if they actually plan on being financially independent.

Bo: That’s exactly right. I just think a lot of people don’t realize how and I’m going to say how complicated income can be. But there are I mean there are things like taxability of social security. There are IRMAA surcharges on Medicare. There are different capital gains rates like if your income is at a certain threshold you don’t pay, you pay 0% capital gains but then you go to 15% then if you’re over a certain place it’s going to be like 20% and even 23.8%. So it varies. And so when you get into financial independence, one of the most fun things, like everyone thinks that accumulation is hard and like building up towards financial independence is hard and figuring out where to go and what buckets to build. When you actually get into the other side, when you start living off the assets, you get into de-accumulation, it gets real fun. There’s a lot of really exciting planning that you can do, but you have to kind of know what you’re doing because there are trip wires that small decisions with a long timeline can have big impacts.

Converting 401(k) to Fund Roth IRA (48:34)

Rebie: From Matthew. He says, “Hey, I’m 29. I had a pre-tax 401(k) from a previous job. Should I pay the tax now and then use that money to max out a Roth IRA every year?” Until I pay off my high interest debt.

Brian: Wait a minute. We got, don’t take that question down yet. Okay, he’s getting fancy with it. So, all right, let me start here. Maybe too fancy.

Bo: All right, I’m going to try to answer this in seconds. Foreshadowing. When we leave a job and we have an old 401(k), there are four, but really only three. There are four options that you have with what to do with that 401(k). I say there’s not really four. There’s only three because one is to cash it out. That never makes sense if you’re under 59 and a half because you’re going to pay ordinary income tax on it as well as a penalty. So like I kind of just like ax that one away. So then you have three options. You can leave it where it is. You can roll it to an IRA or you can roll it to your new 401(k). So I thought where you were going this question is hey I’m 29. I’ve got a pre-tax 401(k). Should I think about converting this to Roth? Because I get young people ask me that all the time. Well, the question is it would depend on your personal circumstances. What’s your current tax bracket? And if you were going to convert that pre-tax IRA to Roth, is paying the taxes today worth going through the conversion because by the way, even if you convert pre-tax assets below 59 and a half, there’s no 10% penalty. It’s just a taxable event if you were to do that. But that’s not your question. And your question was, should I cash it out, pay ordinary income tax, pay a 10% penalty, and then just use it to fund Roth? And oh, by the way, I’ve got high interest debt sitting out there. That’s kind of like this thing buried at the end.

Brian: I know it because I pull up, go to moneyguy.com/resources, and it’s like, okay, highest deductible covered. Get my free, get that free money with the employer matching. Yoohoo, high interest debt. How in the world we even get to Roth, doing Roth contributions, we’re missing some things. So you just spoke so highly of Roth. He got excited. Matthew, look, I’m glad you got the 401(k). You probably loaded it up hopefully just to get the match. We got to extinguish the high interest debt before we do any of the other stuff. That doesn’t mean by the way I will say because then that leads to the next thing was okay. So that means I need to go take the money out cash. No, I think you need to. There is some lifestyle stuff. You need to be honest because often sometimes we hit the easy button way too quick and then our future selves is the victim or the worst for it is that I do think you need to prioritize the high interest debt. Flip this script on this question. But don’t just use the easy button of just taking that money from a former retirement plan that’s supposed to be retirement money. You need to figure out look at your lifestyle, look at your expenses, and figure out how do you attack this ASAP to extinguish that high interest debt.

Bo: I’m always amazed that people don’t realize how costly it is to cash out a retirement account. If you are thinking about this, I want you to go to moneyguy.com/resources and I just want you to take that amount that you have in that pre-tax 401(k). I want you to drop that into our wealth multiplier. But I want you to see what that can turn into. And then I want you to ask yourself, okay, am I willing to forego that plus pay ordinary income tax plus pay a 10% penalty to cash this out? And it just about never makes sense to do that unless there’s some sort of unforeseen emergency situation that you’re in. And if you’re funding your 401(k), you should already have a fully funded emergency reserve. So that shouldn’t be the case anyway.

Brian: Hey, respect the FOO. Don’t be FOOish, which is foolish.

Rebie: Matthew B, I need to give you a tumbler. Thank you for your question. Since we answered it, just email [email protected].

Selling Gifted Gold and Silver for Emergency Fund (57:33)

Rebie: Sam N writes, “After being gifted gold and silver from a family member, I am considering selling to complete funding my emergency fund. Do you think it’s worth selling so I don’t lose the time to invest?” Thanks.

Bo: So, I want to be I want to be careful here. We cannot give you specific investment advice and this would fall in the camp of, hey, should I sell this to go do this thing? That would be specific investment advice. I will tell you our thoughts on precious metals. When it comes to investing, we do not get super excited about precious metal investing because the only thing that makes a precious metal more valuable is if someone is willing to come along behind you and pay more than you paid for it. It does not innovate. It does not create profit. It does not create an income stream. It does not grow. It does not multiply. It literally just sits there to store value. And so what generally happens is as things get more uncertain and more scary and fear increases, the price of precious metals increase. And then when the counter happens, the price of precious metals come down. So for us, it is less tied to like economic profitability. It’s more tied to fear. So we don’t necessarily love precious metal investing. However, personal finance is personal and some people do find utility in having some allocation to precious metals, whether that be gold or silver, and they like to hold it as a hedge against whatever various risk they think might be the risk. And so, you have to decide inside of your financial plan for the goals that you’re trying to achieve. Does that fit in or does it not fit in? But I don’t love hearing that you don’t have an emergency fund fully funded.

Brian: Well, I’m going to give a perspective because there’s several components going on here is there’s the desire that we need to have an emergency fund, but there’s also the context of this was a gift. And look, I know once it’s a gift, it’s supposed to be yours. You control it, but we all know a lot of family gifts come with strings attached to them. That’s why you see such strange dynamics with money, family, love, and so forth. So, I just wrote down were there any strings of expectations? Meaning that did you receive this as an inheritance or as a gift and it’s got some sentimental value not only for you but also for whoever it started with and is there something that should go into your decision-making process too because I don’t mind sharing that I have received on both sides of the family is that when my father passed away my mom gave me, we have like my dad won it from some sales award from many decades ago where one of the awards was like this ounce of gold and it was really cool because it had an imprint on it and stuff and I still have that. But think about because how often because I don’t mind sharing that where you see family dynamics is sometimes yes there’s a market value to stuff but if you create some strange things with your behavior without taking into account that emotional stuff not only for yourself but also for the people who it could, are there less gifts coming? Or I’m just saying make sure you measure twice, cut once because gifts do come with strings sometimes. And then how much of a change is this going to create? Because I think sometimes more benefits going to come from you changing your behaviors and getting very serious on why are your emergency reserves not at the levels they should be? Because I don’t want this, hitting once again, I’ve said it earlier today, hitting the easy button is not usually or always the best solution. You might need to see if this is a bigger symptom of you need to look at how you’re spending your money, your outgoing expenses because just selling something or receiving a gift and then you didn’t really solve the problem of what’s creating the situation in the first place.

Rebie: Thanks. Great. Well, Sam, I hope that helped you think through this. Thank you for asking the question and thanks to Bo for letting us ask one more question.

Closing Thoughts (1:02:04)

Rebie: Sam, if you want a Money Guy tumbler, since we answered your question on the show, just email [email protected]. Thanks for all the questions, everyone. We love answering them. Thank you for joining us every Tuesday at 10:00 a.m. Central right here on YouTube for the live stream. And remember that moneyguy.com/resources is always there for you. Tons of free downloads, free calculators, our ultimate guides on all the topics and more that we’ve covered today. So, thanks so much.

Brian: I always like to remind people, and this is why I want you to really focus on using our resources, maximizing things, is because a lot of you guys, how your story begins does not define how it has to end. And we’re trying to load you up so you can live your great big beautiful tomorrow. I’m your host, Brian Preston, Mr. Bo Hanson, Rebie, and the rest of the content team. Money Guy out.