All of Our Money Rules (And When to Break Them)

Introduction – The Money Guy Rules (0:00)

Brian: Here’s the thing. The Money Guy rules exist for a reason. We want to give you financial guardrails to help you succeed. But what happens when life doesn’t fit neatly into those guardrails?

Bo: Brian, I am so excited because today we’re going to cover all of our Money Guy rules, why they matter, and when it’s okay to break them. Because, as you guys know, personal finance is personal.

Brian: I’m Brian, he’s Bo, and we’re financial advisors here to help you build wealth and break the rules. And with that, let’s jump right in.

Rule 1 – The 20/3/8 Car Buying Rule (0:34)

Bo: All right, Brian. So, the very first rule we’re going to look at is one that I think a lot of people are familiar with, at least when they think about the Money Guy ecosystem. And it’s our rule around buying a car, the 20/3/8 car buying rule. We say when you buy a car, whether it’s new or used, we want you to put 20% down. We want you to not finance it for any more than 36 months or 3 years. And we want your total payments to not exceed 8% of your monthly gross income.

Brian: The reason we came up with this is way too many Americans are literally driving around in their wealth. Cars are the biggest wealth killer. And if you don’t believe me, I want you to take into consideration that if you look at what the median income is, it’s around $45,000 for individuals.

Bo: That sounds fine. That nothing crazy there.

Brian: That sounds fine until you take into consideration that the average new car is now $50,000. There’s a lot of people out there that are driving around cars that cost more than they make in a year.

Bo: And look, we know that a lot of financial influencers out there say, “Only pay cash. Only pay cash. Only pay cash.” And that sounds wonderful and it’s great and we actually agree and subscribe to that idea when you can. But if you’re early in your journey or you’re just starting out or maybe you’re in that messy middle, a lot of times paying cash is not an option and you have to have an automobile so that you can actually get to your job.

Brian: So let’s talk about when do you break our rules. When do you break 20/3/8? And we just said it. Bo just, we do echo this. If you’re at the season of life that you can pay cash for a car, pay cash for the car. But if you need to get to your job to start the wealth building journey, we’re okay as well with using 20/3/8.

Bo: Another time when it might make sense to break 20/3/8 is if you decide you actually want to be more aggressive than 20/3/8. So perhaps you want to put more down than 20% so that way you can buy a more expensive car or get a nicer car. Maybe you don’t want to finance it for the full 3 years or you don’t want to use a full 8% of your monthly gross income. It’s okay to break it if the numbers go down, not if the numbers go up.

Brian: But remember, this is not to buy luxury cars. This is really so that if you think about a family trying to extend it out so they can now get that more expensive minivan or something that’s more functional. We still want you to understand that you don’t use 20/3/8 for luxury cars and you’ve got to make sure that your monthly investments still exceed that monthly car payment.

Rule 2 – The 3/5/25 Home Buying Rule (2:57)

Bo: All right, Brian, let’s talk about rule number two. This one also has to do with consumption, but this is a much bigger purchase. This is our home buying rule. We think that when it comes to buying your first home, we want you to follow 3/5/25 where you put down 3% as a down payment, you plan on being in the house for at least 5 years. And we want your total housing cost to not exceed 25% of your monthly gross income.

Brian: And if you want to know why does this even matter? Why are we focusing on this? The biggest financial decision that most people will make is their primary residence. So you’ve got to make sure you understand the ins and outs so that you don’t wrangle yourself or you’re house rich life poor or you never build enough margin to even save for the future.

Bo: Yeah, that’s the whole idea. The reason that we have this rule is so that you don’t allow your financial life to get out of whack. We don’t want you to have so much money going towards housing, so much money going towards putting a shelter over your head that it begins to either one, crowd out the other areas where your dollar should be going or even worse, an unknown unknown comes your way and you can’t afford the place that you’re living.

Brian: So, let’s talk about when do you actually break this? And look, this one’s a little in that gray zone, but we’re okay because we understand that personal finance is definitely personal. And I think a lot of you guys, especially with housing right now, we just came from a post-inflationary runup of housing where over 3 years it went up like 50%. So the affordability is a completely different equation now. So a lot of you maybe you’re on the up and up with your career and you’re looking at your income and you say, “Hey, this is where my income is, but I know in two years, three years from now, my income will be here.” And you’re pretty assured because maybe you’re an engineer, maybe you work in the finance space, maybe you’re an attorney or a doctor. We think it’s okay to kind of spread that out and extend the budget a touch because, like I said, we’re breaking rules here if you know that you’re going where the ball is going, not where you’re at currently.

Bo: And again, the idea is if you go above 25% in the very near future, 1, 2, 3, 4 years, it would be down below 25%. You need the income trajectory for that. If you have an income trajectory that’s just at the rate of inflation and it’s not going to meaningfully move that needle on the 25%, then you might want to avoid it. Now another time when you might want to break, and a lot of people fall in this category, is if you live in a high cost of living area it may literally be impossible to follow 3/5/25 if you’re trying to buy on one of the coasts or in a major metropolitan city. So if you live in a high cost of living area, but there are other resources available to you like public transportation or things like that that cause the cost of living to come down, in those scenarios, it might be okay to stretch slightly above the 25%.

Brian: What I love is because we just gave you essentially an asterisk or exception to the rule where you can maybe take this 25% up to 30% because you don’t have the 8% of your income car payment. But realize even if you break this rule, you have to create margin because this doesn’t take away from the fact that you’ve still got to save for the future. So don’t use this exception to the rule as a thing to just think that you’re going to be, you know, rosy days and rainbows and unicorns are here. No, you have to figure out how do you find margin in other areas of your life so that you can still save for the future.

Bo: And if you’re someone who’s out there thinking about buying a home and you want to make sure you’re doing it the right way and you’re really running the numbers, we have a great tool for you. Go to moneyguy.com/resources and check out our home buying calculator. You can plug in your income. You can plug in what your down payment is going to be, the interest rate you’re assuming, the loan term, and it will tell you based on those factors, how much home can you afford. This is a huge financial decision, so you want to make sure that you make it wisely.

Rule 3 – First-Year Financing for Student Loans (6:43)

Brian: The next rule, and I love this one because this is a trap that a lot of young people fall into, is rule number three, which is first-year financing. If you’re not familiar with this, what we’d like you to do is when you’re choosing how much student loan debt that you can take, go out there and check yourself by saying, “Hey, what’s my first year salary anticipated to be?” Don’t let your student loans exceed that number.

Bo: All right. So, why does this matter? Well, a lot of people are making one of their largest, most impactful financial decisions of their entire life when they are 18 years old. They are getting a lot of power to make a very big decision that can have a huge impact later on in their life. A matter of fact, right now, 44% of Gen Zers have an outstanding student loan balance. Almost half of the Gen Z population has student loans and 14% of all student loan borrowers owe more than $50,000. We just told you that the median single income in this country is about $45,000. 14% of borrowers owe more than that. And maybe even the most saddening statistic related to student loans, 24% or one in four adults that are responsible for the student loans, whether they’re paying for themselves or paying for their children, don’t actually believe that they’re ever going to pay those student loans off.

Brian: Well, I mean, it makes sense. If you actually go look at the research on how long the average student loan is hanging around, it’s 20 years. I mean, you can see how, and these are decisions, like I said, that people made when they were 18 years of age. So, this is very scary stuff. It’s okay to definitely be very strict and have guardrails, but all rules usually do have exceptions. So, we can talk about why it matters, but also when do you break this?

Bo: Yeah. And if you are someone who’s starting off, you understand that starting off with this huge amount of debt, it can derail the other areas of your financial life. It’s hard enough coming into adulthood if you’re starting on a level playing field. It’s hard. You’re having to adjust to all the new intricacies of independence and being on your own. And if you combine with that the idea that you have this huge burden of debt that you’re dragging behind you, it just makes the journey that much more difficult.

Brian: Well, I always, when I remember when we were coming up with this rule, I’m hoping that people will be a little more deliberate with what their major is and where they go to school so that they can actually not drag around this debt for 20 years. That’s why I spent a lot of time in Millionaire Mission talking about it does matter where you go to school. It matters what you major in. Because when we interviewed our clients, our millionaire clients, over 70% of our clients work in their field of study. That’s great. Meanwhile, you can compare and contrast that to the general population, 70% plus of the population don’t even work in their field of study. So, we have a huge disconnect in education. But, so that’s why we came up with this rule. But now it’s probably a good time to talk about when do you break this rule?

Bo: Well, I think one of the times that you can break this is if you’re someone who is pursuing a specialized degree and that specialized degree has a high likelihood, a high probability of producing outsized income. So these are people like attorneys, doctors, medical professionals. If you’re someone who’s going to school for those, it might be necessary for you to rack up more student loan debt than what your starting salary will be or what your resident salary will be with the understanding that the income is going to increase, that you will be able to extinguish that at some point in the future.

Brian: Yeah. But I still want you to keep and aim to keep the student loan as low as possible because you’re already naturally going to have a much larger student loan debt because of how long you’re in school. Let’s not exacerbate that problem by loading up on expensive housing because the bad thing about student loans is they let you pay for anything. They let you do anything. I mean you can go buy a case of beer with your student loan. You can go do rental. I mean there’s, how about Greek life, sorority, fraternity? Do not fall into these traps, guys. Keep that student loan as low and small as possible. Your future self will thank you.

Rule 4 – Always Be Buying (10:53)

Bo: All right, Brian. Let’s talk about our next rule. This is rule number four. And this is one that we absolutely love. And the rule is simply this: always be buying. No matter what the market’s doing. If the market’s going up, you should be buying. If the market’s going down, you should be buying. If the market is going sideways, you should be buying. We always want you putting your dollars to work.

Brian: Well, I mean, why this matters to me is that I’m trying to create systems that take the emotion out of the process. A lot of people say, “Well, what good is a financial advisor?” The big thing that we do for clients is we talk them off the ledge because you got to have a system so that when the stock market gets beat up two out of every 10 years, you’re not looking for the exits. And also, I want you to have the fortitude that when things are cheap and you get the best opportunities to buy when you can get the biggest discounts and the biggest growth factors, I want you to have a way to run in when everybody else is running out. And you know how you do that? Always be buying, baby. Because if you have a system to where automatic for the people, everything is happening every month, you don’t get to outsmart yourself with your emotions.

Bo: So if you’re supposed to always be buying, when does it make sense to break this rule? Well, it’s okay to break this rule if you’re not at that stage of your financial journey. And Brian, hold the thing up for me. We have a nine-step process that will tell you what to do with your next dollar. So, if you’re someone who has not got your deductibles covered, you’re not getting your full employer match, you have high interest debt, you’ve not built your emergency fund, you might not be at the place where your dollars should be buying. They should be doing those other parts of the financial order of operations, but once you get through step four, then we want you to always be buying.

Brian: Well, and also when you retire, I mean, this is the thing is that you do get to a point. What’s weird is we live in a consumption society. So the majority of Americans are actually really good at consuming and using their assets. But a lot of you financial mutants, we’re great at saving and investing. I want you to know it’s okay when you get to that point, celebrate that you now have reached the threshold to where it’s okay to use the resources to consume like your peers because you did all the hard work in the years earlier.

Rule 5 – High-Interest Debt Guidelines (13:06)

Bo: All right, Brian, let’s talk about our next rule. This is rule number five. And this is actually sort of a rule that encompasses a number of different things. And these are our high-interest debt guidelines. We get asked all the time, Brian, all right, I love the financial order of operations, but I see that there’s sort of like these two different categories. There’s step three, which is pay off all the high interest debt, and then there’s step nine, which says pay off all the low interest debt. Well, how do I decide what’s low interest and what’s high interest? And why should I tackle the high interest first?

Brian: Yeah, we look, we tried to put some math to this and a process. I laid that out once again in Millionaire Mission on risk-free rates of return and equity, taking getting a return for the risk that you’re taking. But at the end of the day, we still want you to pay off these debts. We want you to own your life. So that’s why student loans, we base it down by age. We want you obviously when you’re in your 20s, you can take more risk. We’re okay that you might have a 6% student loan that you’re making sure you’re doing your Roth IRA and other things. Car loans, a lot of you, you have to get to your job to start building wealth. Of course, we want you to be paying cash. We’ll talk about the exceptions to the rule or when to break it, but it’s understandable in the beginning, you might have to take for a very short period of time an interest rate higher than you’d want to just so you can get to your job. And then credit cards. A lot of people are shocked because we just have zeros all the way down. We’ll talk about that in a minute because I think a lot of financial mutants are looking at this, they’re falling into the dope trap that the credit card companies have laid out for them.

Bo: So, why does this matter? Why does discerning what counts as high interest debt and low interest matter? Because we want you to be able to strike that balance and recognize that there is an efficient and an effective way to deploy your dollars. We’re really doing two things: we want you to pay off debt and knock that out and get your liabilities knocked down, but we also want you to be building up the asset side of your equation. So, understanding what counts as high interest and what counts as low interest allows you to discern how much should be going to each one of those buckets.

Brian: So, when can we break this? As we already kind of shared with you, car loans look 20/3/8, but that’s why we put a little bit higher rate in there. 10% is a high car loan.

Bo: I don’t want to act like it’s not, but if you have a 10% auto loan and it fits inside of 20/3/8, we would argue that’s okay. That’s acceptable for someone in their 20s. Continue paying that on the 20/3/8 and use your resources to do something else rather than extinguish that debt quickly.

Brian: And I know we didn’t put it in here, but I did think it was worth at least highlighting is that 0% interest rates. I know all my financial mutants think that you’re getting away with something. It really is a rope a dope because they’re trying to get you. The credit card companies are giving you that first shot, very low interest rates so you’ll fall into their trap. Don’t do that. That’s why I know that kind of goes counterintuitive to when to break the rules, but I’m just telling you, don’t fall into the trap that the credit cards and the banks have put out there for you.

Rule 6 – Emergency Fund Guidelines (16:11)

Bo: All right, Brian. Rule number six. This has to do with your emergency fund. We want you, if you’re following the financial order of operations, Brian, hold the thing up for me. If you’re following the financial order of operations, by the time that you get to step number four, we want you to have a fully funded emergency reserve. And we consider a fully funded emergency reserve likely somewhere between 3 months of living expenses or 6 months of living expenses. And there are a number of different factors that determine which one makes the most sense.

Brian: Yeah. And I love that we’ve got it right here on the screen. You can see, you can compare and contrast these. Obviously, if you have a good job with high job security or you could go get another job really quickly, that lets you be more on the three-month side. Whereas, if you got low job security or you have to move across the country, you want to have a little more buffer. If you got multiple people counting on you for money, that’s going to push you higher on the buffer. But if you and you have another spouse in the house that are making about the same amount of money, that’s lower. So, you can go through this list, you can figure out, are you 3 months, are you 6 months, but you’re still probably trying to figure out why does this matter? And Bo kind of alluded to this. This is what’s going to be that margin of protection that’s going to keep you from making the desperate decisions that make you go run up credit card debt, use payday loans, all the horrible stuff when you hit an emergency and you don’t have the money in the bank. None of the options are good. So that’s why we have emergency reserves to keep you safe from those bad decisions.

Bo: All right, so now we’re trying to think through, okay, well, when does it make sense to break this? And you may be thinking, okay, well, if you have high interest debt. Well, if you have high interest debt, you’re in step three. You haven’t made it to step four. So, by paying off high interest debt, you’re not actually breaking the rule. So, what is an example of when you might actually break the 3 to 6 month emergency fund rule? We said if you’re someone who has almost a fully funded emergency fund but you’re not quite there yet and maybe we’re getting towards March towards April and you haven’t maxed out last year’s Roth IRA contribution, it’s okay in our mind if you take some of that emergency fund for a moment, for a moment, and use that to retroactively fill up how much you have left in that Roth IRA bucket so that you can make sure you get those dollars in because if you miss the Roth window, you don’t get to go back in time and make those contributions in the future.

Brian: But get in there, use that. I want you to be scared if you do this so that you’re not letting this break glass moment last for that long. The other one is obviously when you reach financial independence, this has two folds to it. In the fact that you might be a person that when you get to step eight of the financial order of operations, you want to expand cash so that you can play mini Warren Buffett and buy things when nobody else has cash, like the next time we have a market downturn. The other side of this is retirement. When you reach retirement, now you’re going to be living off these resources and you’re no longer working. This is a point where actually your cash reserves are going to go bigger. Instead of it being 3 to 6 months, it might be 12 to 18 months. So you can see we have both extremes covered here on when to break this rule.

Rule 7 – The Goldilocks Rule for Lump Sums (19:14)

Bo: All right, Brian. Our next rule, rule number seven has to do with when you have a large windfall come your way. Maybe you received a pension payout, maybe you sold a capital asset, maybe you received an inheritance, whatever that thing may be. One of the questions we often get asked is how do I think about deploying these dollars? What should I do? Should I invest them all at once or should I spread them out over time? And that’s why we came up with a Goldilocks rule. And basically, we said you should determine at what pace to invest those dollars based on how big those dollars are relative to your total portfolio. So if this windfall, this lump sum that’s come your way is less than 10% of your total portfolio, maybe you consider just investing it all at once as a lump sum. But if this lump sum represents over half of your liquid portfolio and it’s a really big chunk, then maybe you want to dollar cost average, investing the same amount of money on a monthly schedule over the course of a full year, over the course of 12 months to smooth out that volatility.

Brian: I’m always amazed because there’s a big part of the financial community that this is a debate between lump sum and dollar cost averaging. This is not a debate whatsoever because I mean statistically lump sum is superior but because personal finance is personal, it’s exactly what you just covered. Some of the times these windfalls are such large sums of money there’s a lot of emotional baggage as well as financial risk because what happens if you come into the windfall of your lifetime and then you invest into the 2008 market and you watch 30 to 50% of your assets evaporate within a six-month period? You would be just destroyed. So that’s why we were like, okay, yes, statistically it’s better to lump sum, but sometimes decisions are so big, we have to come up with a way that we can make it systematic to protect us from the 2008 type things. But also, if we’re very emotional people and we find ourselves as perfectionists, we’re trying to figure out the right time to get in, because we’re just so worried that we got to do things right. You know what will work you through the emotional side of that? A good system. So, our rule is going to combine to make sure you’re not sitting on the sidelines too long, but also protect you from something really bad that could happen and derail your entire financial life.

Bo: All right. So, when should you break the Goldilocks rule? When is a time when maybe you don’t follow these guidelines? Well, you have to know yourself and you have to understand what is true about you. Because it may be okay to break this rule if you know that no matter what, you’re a financial decision maker. Maybe this lump sum, this windfall that came in is less than 10% of your portfolio, but maybe it’s still a big chunk of money. If you have a $2 million portfolio and you have $200,000 come as a windfall or come as a bonus, the Goldilocks rule would say go ahead and invest that right now lump sum. But if you’re someone who knows if I invest that and over the course of the next few months the market loses 5%, 10%, 15%, 20%, I’m going to kick myself and I’m going to second guess myself and I’m going to have some angst, that’s okay. Dollar cost average it. Allow yourself to remove the emotion from it. Know what kind of investor you are and you should implement the plan and the strategy that gives you the highest probability of staying the course.

Brian: And then this next exception is really for my financial mutants out there. I couldn’t help it. I was like, maybe this is too in the weeds, but I was like, you guys are going to love this. I have found when the stock market and the financial markets go into bear market status, meaning they are down greater than 20%, you have to look at the values of these investments and you have to go, holy cow, maybe this opportunity is good. So then I want you to understand every time the market goes down below 20% and then every 5% down increment on top of that, you might want to accelerate another month in your dollar cost averaging plan to take advantage of the volatility. This is why, because I know you’re sitting there thinking well Brian this is exactly, but think about if you were in 2008 and the market lost 20% to 30% over that 3-month period. If you had a big lump sum and you know that historically every time it went down 20% and then went down every other 5% increment, if you lump summed in on those increments, you would be sitting pretty when you came out on the recovery because we all know the rubber band effect is that the sharpness of the decline typically is also the sharpness of the recovery. And you need to come up with a system that can help you take advantage of that.

Rule 8 – Save 25% of Gross Income (23:45)

Bo: But remember this is for lump sums. This is for big chunks of cash that you have coming your way because we have another rule as it relates to your paycheck and the money that you have coming in on a systematic and consistent basis. And that rule is we want you investing 25% of your gross income for retirement. These are dollars that are going into employer sponsored plans like 401(k)s, 403(b)s that are going into IRAs, both Roth and traditional, going into HSAs. This is money going into a pension or an ESOP or an employee stock purchase plan. Or maybe this is even just money that’s going into a taxable brokerage account. Now, just to be clear, these are for dollars that are for future financial independence. These are not dollars for the sinking fund for the car purchase or the sinking fund for the next vacation. This is 25% going into future financial independence savings.

Brian: Yeah. I think a lot of people don’t realize if you make under, you know, we have it down there in the fine print, $100,000 for single individuals, $200,000 for married couples, you can count your employer money. That’s right. So, because we take a lot of flack for this number because I think a lot of people out there and there’s other financial people are saying 10%, 15% is all you need to save. And I have to remind people, look, a lot of these systems were designed back in the 90s when we had pensions, when we had more comfort that the social safety net of the government was going to be there for us. But now we know that more of this falls on our shoulders. We have to take responsibility for ourselves. And then you couple that with we look at the statistical research and it shows that most people don’t even start investing until they’re in their early 30s. So you couple those two things together, you’re like, whoa, we need to get serious about saving and investing. So let’s be honest with people. Let’s not give them some false hope. Now look, if you’re watching this and you’re 23 years old, yeah, maybe that number is going to be less than 25%. But if you’re like everybody else and you didn’t start saving, investing till you’re 30, you need to lean into and understand that 25% is going to help you through this.

Bo: Yeah, we know that most people don’t start until they’re 30. And we also know that for most people, life happens and our savings rate when we start likely doesn’t stay that way forever. There are unknown unknowns and life changes. If you’re investing 25% for retirement starting at age 30, doing that, you would still have the ability to replace almost 120% of your pre-retirement income if you retire at 65, if we just assume a very conservative 6% rate of return. But realistically things happen in your 30s. Messy middle comes along, kids come along, house comes along, other things happen that likely might take you off. So, the earlier and sooner you can start saving 25%, the more of a head start you’ll give yourself to figure out if there’s times in the future where you need to course correct.

Brian: So, let’s talk about when do you break this? And we’ve already alluded to the first one. And I would encourage you go to moneyguy.com/resources, How Much Should You Be Saving. If you’re somebody who’s watching this content and you’re under 30 years of age, there’s a good chance you’re ahead of the curve and you can adjust your savings rate accordingly.

Bo: Or maybe you’re someone who just has a unique season of life. Oh man, I just had kids or I just moved or I just changed jobs or those things happen and your savings rate might have to take a hit because of that. That’s okay. Let it happen. Pull back, shore yourself up and then get back to saving 25% as quickly as you can and your future self will thank you.

Rule 9 – Credit Card Rules (27:10)

Brian: So, the next one, look, and this is one that I’ve already alluded to a lot when we were talking about high interest debt and what is that by age, it’s credit card rules. And y’all know the saying, I say it all the time, is that credit card use, that’s okay, but credit card debt, no way are we going to let you pay those predatory rates that these banks are charging.

Bo: Yeah, that’s why it matters. If you look at the average annual rate on a credit card, it is not favorable. It is literally compound interest working against you. So, that is the stick. But there’s also a carrot to using credit cards. There are financial benefits including rewards, security, credit building, purchase protection. There are a number of different reasons why a credit card can be useful if you’re using it right, but chainsaw dangerous if you’re using it wrong.

Brian: So, when do you break it? Look, if you’re like the 50 plus percent of Americans that are carrying a balance on your credit card, you’re not a credit card person. So, you don’t use it. You fall more in the camp of some of the people who have to run a strict line and not even use credit cards. They use debit cards and other things. It’s okay. Just know thyself. If you’re not paying it off monthly, you’re not getting ahead.

Bo: And look, don’t assume that 0% offers are some amazing thing that they’re not. They are not a reason to break this. They’re not a reason to carry a credit card balance. If you’re not paying your balance off in full every single month, no matter what the interest rate is, you’re likely doing it wrong.

Brian: I’ll echo what I said earlier. Don’t fall into the dope trap. That can mean multiple things. It can mean rope a dope because that’s what the banks are trying to do by giving you this 0% so you’ll fall into their trap or it could be about, and I’m going to say it, it’s just as dangerous as bad drugs if you think about the drug dealers give you that first hit for free because they’re trying to get you addicted to be just like all the other consumption people of society. Don’t fall into that rope a dope.

Rule 10 – Roth vs. Traditional Contributions (29:08)

Bo: All right Brian let’s talk about our next rule and this one centers around how do I decide when it comes to 401(k) or retirement plan contributions, how do I decide between pre-tax or Roth. And we have a little test you can do. If you take your marginal federal tax rate and your marginal state tax rate and you add them together, and if you find that the combination of those two is below 25%, you may want to prioritize Roth contributions. If, however, you find that your combined marginal rate is greater than 30%, you may want to focus on pre-tax contributions because every dollar that you put into the pre-tax bucket can save you like 30 cents in taxes. It’s a huge imputed rate of return at those tax rates. And if you’re between 25% and 30%, then you want to factor in other things like your unique age, your tax rate assumptions, and your current account structure.

Brian: I mean, look, I come from a public accounting background. I’ve practically turned Bo into a CPA with how much I’ve harped on taxes. Taxes are a big part of what’s going to impact your financial life. So we’re always trying to find that tax arbitrage moment: how do we pay the least amount of taxes but leave the most amount of your army of dollar bills working? And you’ve got to be proactive with looking at the way you’re handling your taxes. That’s why when you’re young, yeah, we love tax-free growth because you’re also probably not in your peak earning years, but you’re crazy if you don’t while you’re in those peak earning years. If you’re paying close to 50%, think about that. If you got 37% federal taxes and then you got state income tax, six to 10% depending upon which state you live in, you can quickly see that close to half of your money is going to taxes. And if you’re part of this FIRE movement or FINE movement and you think you’re going to be leaving the workforce before you’re 75, there might be a moment in time where you can from an arbitrage standpoint pay a lower tax rate to convert some of this money into Roth. We want to take advantage of those low tax rates, but ultimately it’s so you keep more money working in your army of dollar bills.

Bo: Yeah. And we don’t know what future tax policy is going to hold. So if you can have some tax diversification, no matter what future tax policy holds, you can remain in control. Literally, you can get to financial independence and you can pick and choose what tax rate you pay based on which account you’re pulling out of.

Brian: And when to break it. Bo just came to me recently and I was like, he’s like Brian I’ve been thinking about it. Yes, you’re in the highest tax rate, but you’re also getting to the age and you have a disabled daughter that will be able to use this money and actually stretch that money beyond. You ought to consider maybe using Roth in your retirement account instead of doing the traditional for the tax savings. That’s okay because I’m building legacy and I think a lot of you will reach that point. This is when it’s okay to break the rules.

Rule 11 – Follow the Financial Order of Operations (31:53)

Bo: All right, Brian, let’s talk about our next rule. So this is one again. If you listen to our show for any amount of time, you hear us say this all the time. We want you to follow the financial order of operations. Brian, hold the thing up. The financial order of operations is a nine-step process to help you know exactly what you should be doing with your next dollar.

Brian: So here’s the thing, and I love this because we have come up with the financial order of operations, affectionately known as the FOO. That’s right. Do you know what happens if you get the FOO out of order? OOF. OOF. Did you hear that? OOF. That is the best dad joke I’ve heard all week. And I would encourage you because look, we don’t want you trying to do the financial order out of order, doing missteps, because that is going to work against simplifying, making your money work harder than you can. So, don’t fall into the oof.

Bo: Reaching financial goals is difficult enough on its own, but if you’re all scattered in your goals, it’s really, really hard to stay laser focused and move in the right direction. So, what the financial order of operations allows you to do is it allows you to compartmentalize what the next goal is. Okay, I know I want to get my high interest debt knocked out. Okay, great. Did it. Now, I want to get my emergency fund funded. Okay, great. Now, max out my Roth. Great. Maxed out. It gives you these small, tangible, attainable goals that will not only help you stay optimized, but will serve as a mechanism to make sure that you stay on track.

Brian: Yeah. And if you’re trying to figure out when to break it, personal finance is personal. And if I’m being honest, I’ve always tried to have a no hypocrite policy. There were moments when I was thinking about going into the entrepreneur life and I had to build up cash reserves to make it for the first two to three years I was doing the business. I wasn’t moving on to step five like the financial order of operations would have told me because my life needed me to have a boosted up step four. So it’s okay if you look at your personal life and you know in this season I’ve got to do things a little differently. I’ve also seen people who say you know what I’ve got a growing family. I’m in the messy middle. For the next few months I’m going to come up with that 3% down payment. That’s outside of the financial order of operations, but we understand that personal finance is personal and we want you to live your best life. But also, you need to feel like there is a buzzer and a ticking clock in the background that if you don’t get back to the FOO that your money will start working against you. It’s okay to kind of come off the path for a moment in time, but just don’t find yourself taking a nap and letting the FOO not work for you in the long term.

Rule 12 – When to Hire a Financial Advisor (34:25)

Bo: All right, Brian, let’s move on to rule number 12. And this is one we get asked this question all the time. How do I know when it’s the right time to consider taking the relationship to the next level or hiring a financial advisor? We think there’s really three points in time where people either hit one of these points or maybe some combination of these. And it’s one, when your life circumstances have gotten so complex you don’t know what you don’t know. Two, your time has gotten so limited that you recognize a lot of the important financial aspects of your life keep falling on the back burner. Or three, the gravity of your decisions become so great that you don’t feel comfortable navigating alone. It’s when the $10 decisions start turning into $100,000 decisions. If you find yourself in one of those three areas or some combination of those, that might be an indication that it’s time to consider professional help.

Brian: Well, and why this matters is I think a lot of people have the wrong idea. They think we don’t like do-it-yourselfers. Are you kidding me? We have hearts of educators. We are literally on the front lines of making sure you know exactly what to do with your money because we understand that if we load you up, you’re going to have success and you’re going to be rewarded. You don’t need a financial advisor when you’re starting out. But as complexity starts showing up, you’re going to potentially need help to help you optimize and make sure you don’t make big mistakes.

Bo: But a lot of people end up saying, “Oh, you know what? I listen to the show. I’ve got the financial order of operations. I’m just going to, I’ll wait till the day before I retire and then I’ll hire an advisor. I’ll just wait and I’ll wait and I’ll wait.” A lot of folks don’t realize there’s a lot of proactive planning that you can do early on. Yes, even in your 30s, even in your 40s, where if you make some small decisions, just those small one, two, three changes in your financial trajectory can have a huge impact later on in your financial life. So, a lot of folks might actually benefit from hiring an advisor earlier, especially if they have something like a really high income or a complex income structure or they have unique things going on in their financial life that a financial advisor might be able to speak directly to.

Brian: So, when to break this rule? Look, I’m okay that some of you will never graduate beyond do-it-yourself. That’s right. One of my heroes is Clark Howard, and I’ll never forget that one of my buddies who introduced us was his accountant at the time doing his taxes and he always talked about how Clark wanted to know how everything worked. And Clark would never ever probably be a financial planning client because he’s just going to be one of those guys. But he’s also not going to become the biggest troll of financial advisors because I think he understands that yes, there are going to be people who forever will be do-it-yourselfers and that’s okay. But there will be a moment in time that for a lot of you, you’re going to recognize the complexity is going to get to a point that you just don’t know what you don’t know or you’re worried about if you leave this earth tomorrow, what’s going to happen to your loved one and who actually thinks about things the way you do as a financial mutant who can do this on your own? And that’s when we’re going to leave the porch light on for you. And you can consider going to moneyguy.com, look at the become a client section, and we help you answer the questions and we help you live your best financial life. I’m your host Brian joined by Mr. Bo. Money Guy team out.