Are You Doing Better Than the Average American?

Are You Doing Better Than the Average American? (0:00)

Brian: Guys, are you doing better than the average American?

Bo: Brian I am so excited about this because we know that our folks, they don’t like to compare themselves. I don’t want, that’s not what we do here. But it is great to just have an idea of where am I, where are others, how do I stack up, how do I know if I am doing the same types of things that other financial mutants are doing? And today’s show is all about figuring out how we are going to discern that.

Brian: Well, I mean, look, if we want to just have a baseline, what is the median financial assets of the typical American if you exclude home value? Look at this. This is why if you were using comparison, the typical American is not who you want to compare anything to. So if you’re trying to do any type of pace setting whatsoever, just to know if I’m doing the minimum so I know if I’m ahead of the curve, behind the curve, right where I’m supposed to be, there needs to be a better way to know how to do money.

Bo: Now, these financial assets, this is like checking, savings, retirement accounts, pensions. It does not include vehicles, other types of assets, home equity, collectibles. So if you’re just thinking about kind of like your liquid portfolio, you would look at this and if you’re a 35-year-old, you say, “Hey, if I have more than $37,000 in liquid assets between my retirement accounts and my cash and my checking, I’m probably doing okay.” But we know that even as valuable as this data can be as a checkpoint, a lot of you, a lot of the financial mutants out there, you don’t want to be the average American. That’s not who you compare yourself to. That’s not who you want to stack up against. So we decided that there’s a better way. Rather than seeing how you stack up to the average American, we want to look at how do you stack up to other financial mutants.

Brian: And with that, we’re introducing our annual survey. Look, I know I’m a little rusty. I took two weeks off. But this is one of my favorite things. If I could give you the vision, what motivated me when I started this all out is that I had read The Millionaire Next Door and I loved how that book shed light on the fact that millionaires were different than what Robin Leach and Lifestyles of the Rich and Famous was sharing. So imagine my happiness that we have now reached the level of success that we have enough viewers that we can every year survey not only our millionaire clients but survey our audience and make something beautiful. That’s what I get excited about because the educator in me, the heart of the educator that I have, I plead that you guys, I know you’ve probably done it every other year we’ve done it, please do it again because we use this for content.

Bo: Yeah. I think what’s so great is we’re not just looking for, hey, who are the financial mutants out there that are killing it? Who are those people out there that are in step nine and crushing it? We want to know wherever you are. Maybe you just found this and you’re 45 years old and this is your very first interaction with the Money Guy Show and you’re starting to make good decisions. We want to know about that. Maybe you’re someone who’s been following for a decade and you’re doing all the things right. We want to understand where you guys are. And the reason we want to do that is so that we can create valuable content that helps all of you live better financial lives. Those of you that are ahead of the curve, those of you that are behind the curve, and those of you that are right on the curve, we use this to figure out how to customize, create, and curate content for your benefit. It’s why we do it. So Rebie, if there are folks out there and they’re like, “All right, I want to do it. I want to participate. I want to get my data in there so that I can be represented.” What do they need to do?

Rebie: Step one, just complete the survey. Go to moneyguy.com/survey. It only takes a few minutes to complete.

Bo: Moneyguy.com/survey. They say whenever you want to learn somebody’s name, like you meet somebody, “Hey, Brian, it’s so great to meet you.” I feel like we just yelled Candyman in the mirror with us. Moneyguy.com/survey. Go there.

Rebie: Step one, complete the survey. We’re going to compile that data later for a cool snapshot for multiple episodes of the show. And that is step two. That’s going to shape the show. We truly have at least two episodes, if not more, in the works that’s going to be based on this data. So we need everyone to show up for it. We have been so excited to see the participation and the engagement over the past couple of years. I love that this is now an annual tradition. So please show up and continue this annual tradition, continue making it awesome and super valuable. That is what we’re going to be doing. We’re going to compare mutants to the average American, to maybe our Abound clients, and break down more of this data to show you guys where everybody is in the audience and continue to create content off of that. And then lastly, step three, once you fill out the survey, we will notify you specifically when those episodes are live. Like, hey, the episode that you helped shape is now live. We will send you an email and let you know that. And don’t worry, we’re not going to spam you. I just want to throw that out there. We love to connect with you via email because that’s where the algorithms don’t matter, to be honest with you. It actually just lets us connect with you. So our email newsletter, the Moneyverse Discord, that is a more direct, just like, hey, we’re friends, we’re connected. That’s all that is. So we’re not going to spam you. We’re just going to notify you when, hey, you helped us do this. You took a few minutes of your time to help shape this show and it is now out here for you to see and enjoy and interact with, to share with your friends, all of these things. So like Bo said, go to moneyguy.com/survey to participate. We cannot wait to see the results and to share this content with you. We really appreciate you making this such a fun annual tradition.

Brian: Can I tell you one of the things I love about the survey? We sit around as a team and obviously every year the survey has a lot of the same questions, right? Because we want to see how that’s tracking through time. But every year we’re like, “Hey, are there things that we didn’t ask? Are there questions that we should ask? Are there things going on out there in the financial world that we want to see? What are our financial mutants, what’s our audience doing? How are they using these things? How are they thinking about these things?” And so every year we have new questions, new angles, new thoughts, new ideas. And this year’s no different. So I’m super super excited once we get all the results back so that we can then dive into even some of that new stuff. I mean, the old stuff is great too, but I’m excited about some of the new questions on there this year. And this will only be open for a limited amount of time because at some point we’ve got to shut it off and go compile the data and make the show. So be sure to get in on this. It’s going to be open for a couple of weeks until September 30th. So make sure you get in on that sooner rather than later because I would hate for you to miss out just because you didn’t realize it was open for a limited amount of time. And like Bo said, I want everyone to take this. I’m looking at you. If you’re in step one, take it. If you’re in step nine, take it. I want to know where everybody is.

Rebie: That’s awesome. Hey man, it’s so good to have you back. I think I can speak on behalf of me, Rebie, the Money Guy team, and the millions of people in the live stream right now. We missed you.

Brian: Well, y’all probably noticed. Fast forward, I go on vacation, you’re like, I wonder if Brian misses us. And then about day six, all of a sudden the love letters started coming through on the Slack thread. I was like, “Guys, I really miss you guys.” And then y’all gave me a few emojis. It was nice, but I was like, “Oh, I don’t know if they’re feeling the same way.” So then I dropped another love letter in there. I really did about a week in. Look, I love going on trips with my wife. We went with some dear friends over to Scotland and I love the Scottish people. They are the friendliest people on the planet. I really do believe that. I will say, I have this ability where I can kind of interpret people’s emotions a little bit and this is just my opinion. They are the friendliest people, but there’s a little bit under the surface of I don’t know if it’s their history or what, but a little bit of unhappiness there. I just could feel it. It’s also probably the weather. I mean, the weather is schizophrenic because every 15 minutes it’s sunny, clouds coming, it rains, it’s sunny, clouds come.

Bo: No, you had to, the only thing that they got right on the, and I should have brought shorts. I was hot everywhere because we over air condition in the south. They overheat every building in Europe. I mean, it’s 60 degrees outside but the buildings are all 80 degrees. Yeah.

Brian: And so I was hot everywhere. But the best advice I got was to have waterproof shoes and then also I had a Patagonia thin rain coat and I had an umbrella that could withstand some wind. And that was needed. I had a shoulder bag, a cross-body, and I kept my passport.

Bo: It’s a diagonal fanny pack is what a cross body is. We’ve upgraded the fanny pack to cross body now. It’s no longer horizontal. Well, man, we missed you and I’m so glad because now that you’re back, one of the things we get to do is the same thing that we get to do every Tuesday at 10:00 a.m. Central time. We get to load you up with the things that you care about. So if you have a question right now, if there’s something you want to get our take on, something in your life you want us to speak to, we have the team out in the wings collecting your questions. So make sure you get them in the chat right now because we believe that there is indeed a better way to do money and we want to help you do money better. So with that, creative director Rebie, I’m going to throw it over to you.

Q&A: How Do I Count a Pension on My Net Worth Statement? (12:16)

Rebie: We’re going to start it off with Epcot World Traveler 007. It says, “When calculating net worth and investable assets, how do I treat the current value of a fully vested defined benefit or cash balance pension plan with my current employer?”

Bo: Brian, we get this question all the time. Because obviously we have our net worth template that you can get for free at moneyguy.com/resources. And we love tracking net worth annually to understand where you are. And when you do it every single year, you get to track, okay, how far have I come? How am I progressing? How are my financial decisions impacting my life? And I think you even touched on it in Millionaire Mission. A lot of people ask this question all the time. “Hey, I’ve got this pension. I’ve got this defined benefit. How do I account for that on my net worth? How do I look at it? How do I think about where it falls?”

Brian: Well, it’s a good thing this isn’t part of the rapid fire because this one definitely depends. Now, if you go log into your pension website, a lot of them nowadays will have options to where you not only get to choose if you want to annuitize the pension when you retire, you know, you choose the survivor benefit, but a lot of them even have like a third option. They say, or you can just roll the balance over. Basically, we remove the obligation off of our balance sheet and we’re going to let you roll a portion of these assets into your own IRA of choice. If you have that rollover option, they’ll give you what the account’s worth. You can put that on the net worth statement under retirement assets. I have no problem with that. Now the problem is a lot of pensions, because it is a defined benefit program meaning that pensions are promises of future income streams for your retirement, and a lot of websites, especially old school ones, they don’t have a rollover option. They just have a promise of what they’re going to pay you in retirement. And for that, because it’s a promise only and it’s not a rollover of the assets, I think it’s more of what you put on your footnotes as a disclosure of income streams you’ll have in the future, just like you will have Social Security. And you use that as a planning technique where you’ll lower how much money, you know, you figure out what you need in retirement, you’ll subtract what you have coming in from pensions and Social Security, and then whatever is left over is now what you’ll be required to come up with from your own assets to provide in your retirement. But it doesn’t actually show up on your net worth statement because it’s a promise for the future unless it has some value to be able to roll it over.

Bo: Love that. Fantastic. Why don’t we tell people, oh well, just calculate the present value of the future cash flows of that pension? We want to be careful having too much of a false sense of confidence for some promise in the future that may or may not be there due to circumstances that are outside of your control. What are the things that you can control right now today? How much am I saving? How much am I building? How much am I putting away that I know is going to be there when I get there? And we don’t hear about this as often, but in your career, there have been folks who were banking on, “I’m going to have this pension, I’m going to have this guaranteed thing,” and then something happens with that entity, organization, whatever, and all of a sudden that pension benefit they thought was going to be there was changed and was different and was not what they thought it would be. We want you to be careful from having a false sense of security. Rather, we would want you to take hold and have some ownership in your future financial stability.

Brian: This is just a one-off for Epcot 007. Go look at your annual report from your pension. Just make sure to see how well-funded it is. And then from there, you can take that data and go to the Pension Benefit Guaranty Corporation. It’s essentially the government insurance that they provide on many pensions, not all pensions. That’s the other thing you need to find out. Does my pension qualify for the Pension Benefit Guaranty Corporation’s coverage? And then I would compare what you think you’re going to get to what’s guaranteed. And if it’s over what’s guaranteed, the insured amount, you need to make sure your pension’s well funded because that would probably then shape my decisions on how I’m going to use that pension for my future retirement.

Bo: Love that. That’s extra. That’s what the financial planner typically does. Love it.

Q&A: HELOC vs. Saving Up for a $50K Deck — What Should I Do? (17:01)

Rebie: Next question is from Kyle S. It says, “Good morning, Money Guy team. Would like your thoughts on HELOC versus saving up for a new deck. Estimated cost is $50K. No savings currently above our emergency fund. We have a $250K income. Auto loans and mortgage are within the FOO or Money Guy rules.” So he wants a new deck. HELOC versus just saving up for it. How should he think about this?

Bo: Okay. I want to be clear. Kyle, I really need to know the answer to this question. When you say no savings currently above the emergency fund, what I took that as is I don’t have excess cash above and beyond $50,000. That does not mean I don’t have any investments. I don’t have a 401(k), investment account, or Roth. Because I would argue if you were that early in your financial journey, we’ve got this great income but you’ve got these auto loans, these mortgages, but you haven’t started saving yet and building, doing something like adding a new deck, one, I would want to have the question around the necessity of this. Is this a have-to-have or a want-to-have? And I never want to be presumptuous and say, “Oh, that sounds like a want,” because maybe the deck is unsafe or whatever, right? But if you don’t have anything else working for you, if all of the dollars you have are going towards providing for your current life, I’m going to argue that if this deck is a have-to-have, then perhaps the home equity line of credit makes sense because what it allows you to do is finance that cost, assuming that you get a fairly decent interest rate, but still get some money working for you elsewhere. Now, if you do have other investments, if you’ve got your 401(k) and your Roth and that sort of thing, one of the questions I want to figure out is, okay, well, how tight can you make your life on a $250,000 income? How long would it take you to be able to save up that $50,000 for that deck? And maybe it’s a both-and. Maybe we’re going to use the home equity line of credit to do that. But instead of financing it for 5, 10, 15 years, maybe we do the home equity line of credit and pay it off in 24 months or 18 months. So then it’s a both-and, best of both worlds.

Brian: I think you just started nibbling around what I immediately thought. First of all, you make $250,000. This could be something that you could definitely absorb into your lifestyle within hopefully a two to three-year period. So I’m back to your original triage question. Where is this? If your broke is a joke and this is the first thing, and you haven’t done backdoor Roth contributions and loading up your 401(k), this is not the most important thing. But it is one of those things where I see people, and I know somebody who might be sitting in the room who has used a home equity line, when they looked at their life and said, “Hey, I think I can extinguish this big upgrade I’m going to do on the house probably within 18 to 24 months.” But here’s the other part that goes unsaid. A home equity line right now, with typical mortgage rates right now being over 7%, because weird things are going on with the 10-year treasuries and you’re seeing mortgage rates reflect that, if you add on top of that what they do with home equity lines, it’s typically like 2% even more. So you might be paying 8 to 9% on this home equity line. This is not cheap money. So the first thing is that if I’m going to use this, it’s because I value the time of using this resource of like a deck or a pool in the backyard so much because maybe my kids are a certain age and I don’t want to miss out on this window. I’m going to give you the grace if you have so many other good things going on. We just got an update that he does have over $200,000 invested. So I’m going to be okay if you go to the bank and say, “Hey, what could you do on a home equity line,” assuming there’s no cost, and then you figure out maybe you need to save up 25 to 30,000 of the 50, and you do the home equity line just so you have it just in case if you want to accelerate the implementation of getting this deck.

Bo: It’s kind of the same way when we do the 20/3/8 on car purchases. People always are like, why do you treat luxury cars same as cash in 12 months? It’s because I know a lot of you in my own journey have bonuses, have RSUs, or maybe own a company and you get your year-end distribution in December. That’s the same as cash to me. I always try to build what would I do. So I have a no-hypocrisy policy in every one of my rules. And that’s the same thing with this home equity line, is that I would let you do this as a tool as long as you could pay it off in typically probably no more than two years because you’re paying such a high premium on the interest rate. I’d rather you come up with 25 to 30 yourself and maybe you use 25 to just cut the corner off on the time. And Kyle, I don’t know how old you are. You said you’ve got $200,000 invested. If you’re young in your 20s, because what I’m hearing is I’ve got a $250,000 income, I have $200,000 invested, just thinking through the rules of thumbs, that ought to put you somewhere in like your late 20s, early 30s. But I also saw on here he said he’s one to two years away from this deck being a necessity. So I’ve got a one-to-two-year timeline. Are there ways that I can save like a banshee between now and then and finance as little of it as possible? One of the things I think, I don’t know what part of the country you live in, but we’re kind of coming into fall, we’re kind of at the end of summer season when you use a deck a whole lot. Do I want to spend a ton on a back deck right now if I’m going to live somewhere that’s going to be cold and wintry and icy and snowy? Or would I want to save for the rest of this year and the first part of next year, start construction in the spring right at a time when I can get the deck done, get it built, and be able to actually utilize it? Perhaps that gives you just a little bit of time to build up that cash because for these kinds of things, the less you can finance the better.

Brian: Well, I like what you just said. And I know he has two years of grace here with that big of an income. Squeeze in your lifestyle because do you know how much more you’ll enjoy that deck if you actually took some sacrifice on little things? Maybe it’s eating out a little bit less, or you’re a little more picky on how you shop for groceries, or you donate a few things out of your closet or don’t go shopping as much. You’ll enjoy that deck that much more if you take the next two years, because you have the income where you think you could come up with probably the majority if not all of it just by being disciplined with your lifestyle.

Rebie: Good question. Very good question, Kyle. You got him talking. That’s great. We appreciate you being here.

Q&A: I’m About to Max Step Five — Should I Start Prepaying My Mortgage Too? (24:33)

Rebie: Next question is from Kenzie. “Hi, Money Guy team. Just completed step four and working to max step five before end of year. Should I put anything over that towards my mortgage principal at 5.75% before end of year?”

Bo: I want to tell you two things, Kenzie. Smiling. Here’s the first one. I love that you’re trying to max step five before the end of year. Brian, hold the thing up for me. Step five is when we really start attacking and tackling those tax-free accounts, the Roth IRA and the health savings accounts. One of the most beautiful things about step five is it is one of the few steps in the Financial Order of Operations that actually doesn’t have a December 31 deadline. You can actually fund your Roth IRA or even your health savings accounts up until tax filing time next year. So I love the idea of you getting the HSA or the Roth IRA funded before 12/31. But if for some reason that’s not possible, you actually have all the way until April to do that. That wasn’t the question you’re asking, just an I-notice thing you should know. The second part of your question was, hey, should I start prepaying some on my mortgage? Brian, I want you to answer that one.

Brian: Look, here’s the thing. No, the answer is no. But if your payments, let’s just say your payments are $2,340 a month, if you want to pay $2,400 a month, I’m not going to fight you on that because I was never a minimum payment on my mortgage. I rounded up to the next $100, you know, and then I got to the point where maybe I did the next thousand. But I would not get crazy trying to be a debt crusader because 5.75%, I don’t know your age, but that’s probably not going to qualify as high interest, and you just have so much value by doing the Roth, the health savings accounts, your 401(k) at your employer. There’s a reason we have the Financial Order of Operations and I don’t want you to get caught up in the feel-good moment of paying off the debt early when you have so much work to do on building your financial foundation.

Bo: Yeah. I would not pay extra on that mortgage. Would you even do the rounding?

Brian: No, you wouldn’t. Well, no, that’s not true. I don’t want to be a hypocrite. Brian has a no-hypocrisy policy. Not me. I don’t have that policy at all. Brian is just too honest. I have to tell you what I do with my finances. I have done that before only just out of ease so I could mentally account for it. Hey, I’m going to round my mortgage up to this dollar and just so it was an even number every month. It just made the tracking a little bit easier back when I used to track a lot more meticulously. But I’m letting you nibble on the edges with the fringe small part of this. The heart of the answer is don’t do the mortgage first.

Bo: Yep. 32 is how old Kenzie is. 5.75 in my mind does not sound like high interest. We need to get that money in your army of dollar bills. You know, we’re doing a show in a little bit called the Wealth Window. Guys, I’m telling you, if you’re 32 to 48, get in there and get the money working for you. There’s more to come on that when you see this show. Really, respect the FOO. Am I right? If you want to know more about the FOO and how to follow it, make sure you go to moneyguy.com. We have a huge ultimate guide that gives you all about all the steps. It’s going to point you to all of our best resources about it. So be sure you go there and just search for Financial Order of Operations on moneyguy.com and we will hook you up.

Rebie: All right. I want to encourage everyone watching live to get your rapid fire questions in the chat starting now. Put RF at the beginning of your question and I will know and the team will know that that is for our rapid fire.

Bo: Are you going to be rusty, you think?

Brian: I actually rolled over in bed this morning and I was like, “Honey, it’s been week three. I might have forgotten how to do all this.”

Rebie: This sounds like an exciting rapid fire segment we’re about to have.

Brian: I think Bo was just telling me he had felt like he had so much time last time. It was too much time. Maybe I get 20 seconds and he only gets 10.

Bo: Dude, 30 seconds. I could answer the question and eat breakfast. It was wild.

Brian: See, he just bragged. So he only gets 10, I get 20.

Brian: No, you get a combined 30. That is up to you guys.

Rebie: Sick burn. All right. Well, get your rapid fire questions in.

Brian: I found out that when you’re not around, Bo likes to film content without a shirt on. I want to say that. Even my wife was like, “Man, you leave town and these guys take some liberties.”

Bo: I want to be very clear. It was not my idea. Everyone’s like, “Oh, this was Bo’s idea.” This was not Bo’s idea. Bo was just a willing participant. And I’m happy we did it.

Brian: Hey, raise your hand if you’ve been to a wedding where you took your shirt off. It was not me. Bo, you want to raise your hand on that? What a sheepish grin. Next question.

Bo: I mean, seriously, I can’t even think of why you would do, you know, what, dudes, let’s take our shirts off. I don’t know what to tell you.

Brian: Sometimes you can decide if that’s a true story and in what context that is. I just don’t, Bo, I’ve told Bo I was like, we are such close friends and I love travel and hanging out with him, but on the weekend he it’s like Jekyll and Hyde. It’s like he is mild-mannered and then I find out like I wouldn’t be surprised, I took the boy out of Conyers, but I wouldn’t be surprised. You know, if you grew up like we did in south Atlanta, it was not uncommon you look over at the traffic light and you see a guy who’s just riding around shirtless, and you’re like, what context would you get in your car and think, you know what, I don’t need a shirt on.

Bo: That’s a generational thing. Have y’all ever done that? Like you drove home, you were super sweaty from a workout or whatever and you’re like, I’m soaked, I’m going to pop my top off and drop. No, you roll down the window and you let air dry. That’s normal. You can take the boy out of Conyers but you can’t take the Conyers out of the boy.

Brian: I’m going to fight you on that one. That one’s not weird. Driving with a shirt off is not weird if you just got done working out. Oh, the whole content team agrees with me. They’re all nodding. You ride around shirtless in your car.

Bo: There is nobody here. I think that’s weird. I’m sorry. That deserves shame. Shame.

Brian: No shirt, no shoes. I take my flip flops off and ride.

Rebie: Wait, you take your flip flops off to drive?

Brian: Yeah, because it’s not safe to drive in flip flops. It is not safe to drive in flip flops.

Bo: You know what’s so funny? Nobody can’t drive barefoot. It’s weird.

Brian: Hey, Matthew McConaughey did it too. And because if you look good with your shirt off, I would even, some of the comments said, “Hey, Bo looks so good with his shirt off.” I would do the same thing. I don’t ever like to be barefoot though. Like even at my house, I wear slippers. I’ve got like slides that I wear around the house. I just don’t do barefoot. So driving barefoot would be insane.

Rebie: I blame the content team. Y’all are the ones filming the shirtless content.

Bo: I blame myself. Really?

Q&A: What’s Included in the 25% Housing Rule? (32:10)

Rebie: All right, let’s go to Book Nerd 1997’s question. It says, “Hi, Money Guy Show. What is included in the 25% rule for house buying? Mortgage, PMI, property taxes, insurance, utilities? I’m a single income 28-year-old female asking this question. What do you think?”

Brian: And maybe we should go over our 35/25 home buying rules as well because this is about that 25 part. Look, we think, housing, this is something I’m very proud of. We didn’t have to change our rules. A lot of other people, because housing got complicated, they had to change their 20% down to the more modest 10% and then I think they’ve even adjusted to 5%. I’ve always been 3 to 5%. And the reason is back to the no-hypocrisy policy and the fact that I looked around. I knew with my own first house I think I put down 3%. I started asking other financial advisors here in the building, what did y’all put down? And I was like, “Holy cow, this is the dirty little secret. Nobody puts down 20% on their first house. They’re putting down 3%. They’re putting down 5%.” So we just went ahead and built that into our rules. Hey, when you’re getting into your first home purchase, it’s okay if you put down 3 to 5%. We want to make sure that you also live in this house at least five years. There are a lot of transaction costs that go into buying real estate between all the recording fees, the real estate agents, and all those things. So you want to live in it long enough that you can recoup that. This is not a short-term decision. And then we want to make sure that you’re not house-rich, life-poor. So we try to keep your housing expenses below 25% of your gross income.

Bo: So the question therein is, okay, well, what’s included in that 25%? And this is where we’re going to give you a little bit of latitude and a little bit of leeway. When we originally designed it, what we want that 25% to encompass is what I would call the average American’s mortgage payment, which would be principal, interest, taxes, and insurance. So the principal and interest plus most people escrow, so you’re going to have your insurance coming out of that and your taxes. Whatever that monthly mortgage payment is, that’s where we kind of have the 25% cap. But there are some people that want to be a little more conservative than that, and you’re not going to get any fight from us on that. If you want to include the cost of your utilities, if you want to include PMI, which is obviously normally part of the mortgage payment if you’re someone who’s paying PMI, so that would be in there, if you want to put some other quote-unquote housing costs in there to try to make sure you’re staying super conservative, we’re not going to fight you on that. What we don’t want you doing is backing stuff out where you’re like, “Oh, well, if I only think about the principal, well, that’s just 25%,” or, “Oh, if I don’t include the escrow cost, that’s something else.” We want those to be in there because we don’t want you to be in that situation where you are house-rich, life-poor, and you have no ability to create margin inside your financial life.

Brian: But look, I think it’s usually not people trying to be more conservative. People need a little more grace because housing is so expensive. So that’s why I wouldn’t put the pressure on utilities. And even when I wrote Millionaire Mission, I even made a case study in there. If you live in some of these super high cost of living areas like some of the major cities, there’s even a case to be made that a lot of people who live in these big city centers don’t have car payments. And cars typically take up the other 8% of your income. So I made an argument that you could even give yourself grace to go up to 30% if you don’t have car payments and other debts. But Bo’s exactly right. I want our rules to give you where you know where the guardrails are, but they’re not supposed to be so rigid that they can’t reflect the real life you live in. And right now it is hard to buy a house. Housing has been completely distorted. And more to come on this because I’m keeping up with this. Do you all realize that there are like 50% more sellers than there are buyers right now? We are setting up a buyers market. It’s just people are so dug in on what they think their houses are worth that you haven’t seen a complete collapse in home values yet. And by the way, every area is different. This is, you can’t, it’s hard to talk about housing because location matters, but there’s a lot going on under the surface when it comes to housing.

Rebie: Love that. If you are thinking about buying a house, Book Nerd, I would encourage you to go out to moneyguy.com/resources and check out our home buying calculator. Check out our home buying checklist. We have tons. We have a whole hub there to help you make sure, because for most people this is the single largest financial decision and transaction you will ever make. So you want to make sure that you make it as wisely as you can. That’s why we have so many resources on the website devoted to that so that you can do it well.

Brian: Yeah. It’s not the latte effect. It’s the cars and the houses. So we want to help you have all the tools and resources.

Q&A: How Do I Balance Roth vs. Traditional When I’m on the Edge of Tax Brackets? (37:25)

Rebie: All right, let’s do one more big question, then we’ll get to our rapid fire question. Question up next is from MVG Tube. It says, “How do I balance Roth versus traditional when on the edge of tax brackets? I max my Roth IRA and put 14% into traditional TSP plus the 5% match. I can switch to Roth TSP, but it will push some dollars from 12% to 22%. Plus pension.” Does this person give their age?

Brian: Age would be helpful. So if you’re out there, please put that in the chat. I have enough here just to give you some general guidance. Their tax rates, now we don’t know their state income tax, because if it does push it to 22% and they’re in a high state income tax, this could push this over 25% marginal rate, federal and state. 25 to 30 is that gray zone where I need to know your age and your ultimate goals of when you want to retire. Are you going to be part of the FIRE or FINE movement? Those things come into context. But if your income is squarely low enough to where you stay below 25%, we do love Roth because that tax-free growth is very powerful stuff. But we need to know your age because the younger you are, the more it also pushes you into the Roth column because you have more time for compounding growth. I don’t know how consistent and steady your income is, but if you’re someone who can project with very high certainty your income, one of the little games you could play is say, “You know what, I’m going to contribute just enough into the pre-tax or in the traditional part of the TSP to drive myself into the 12% bracket, and then I’m going to put or I’m going to put enough Roth to get there, and then everything else I’ll do pre-tax.” And then what you’re essentially doing is you’re maxing out that 12% bracket, you’re allowing yourself not to trip into that 22%, and you’re still getting a ton of dollars going to Roth. That’s if you want to get real real cute, real real specific with it.

Bo: But I agree with Brian. I think that based on the information we have, not knowing the state, Roth is going to be super valuable. Even if you’re paying 22% on those contributions for that money to go into Roth, I think historically that’s still pretty low. And not knowing your age, if you let those dollars compound for the next 20, 30, 40, 50 years even, that’s a lot of tax-free growth you’re going to be able to take advantage of.

Rapid Fire: It Does Not Depend (39:47)

Rebie: Wonderful. I’m excited to say it is now time for our “It Does Not Depend” rapid fire segment where Brian and Bo get a combined 30 seconds to give you an awesome answer to your financial question. The catch is they cannot say the words “it depends.” Now, to make sure we get the best financial conversation out there, we will have a segment at the end called the “Maybe It Does Depend” segment where they will cover any bases they didn’t get to cover in those 30 seconds just in case. With that, let’s get 30 seconds on the clock and let’s get started. First question: the 35/25 rule is great for home ownership, but how could we adapt a similar rule for renting?

Bo: Yeah, it’s really hard because there’s no down payment for renting and most renting you don’t spend more than five years there. But I do think the 25% still applies and I would actually like it to be much less than that, especially for renting, because the lower you can get your rent, the more you’ll have to save up for that future mortgage if that’s in your plan.

Brian: I just think 25% is a good number for housing. You can use that and you get the flexibility with rent that you can live wherever and do things on your terms. So if you need flexibility in your life, there’s nothing wrong with renting.

Bo: I’ve got something to add to that at the end if we’re making notes.

Rebie: Noted. Next question. What percent of a raise do you invest, spend, and give?

Bo: So I would say that giving is super unique and specialized to you. But I will tell you, when you think about the amount that you don’t give, because I’m of the opinion you give first, then what’s left, I like if 60% goes to savings, 40% goes to lifestyle.

Brian: Yeah. Put the giving first and then do 60/40. 60% to savings, 40% to lifestyle until you get to 25%. Then after you get to 25%, go hog wild.

Rebie: Next question. When is it no longer appropriate to use a target date fund or single index fund?

Bo: Realistically, I think it’s when your portfolio value hits somewhere around $400,000 to $500,000. Those are sort of loose numbers because it depends on the account structure, but it’s when the benefits of asset allocation and asset location can now be justified for the additional effort that it takes.

Brian: Yeah, it’s one of those where those big retirement accounts start getting large, that tax location matters, and that this gets into game time to make big changes. And that’s typically like Bo said, somewhere between $500,000 to $600,000.

Rebie: Man, this 30 seconds is a lot of time. It’s like you never even went on vacation. Next question. What is the biggest thing Brian and Bo disagree on in finance?

Brian: I mean, it used to be debt payment because he would bully me on why I shouldn’t prepay my mortgage. That’s a big part of it. I think when Bo came out, he was very conservative because he graduated college in 2008, but he’s gotten a little more aggressive now. So we we talk about that stuff too.

Bo: Yeah. I don’t know that we disagree on a ton anymore. I think we’re pretty highly aligned in most things financial. Some car decisions we like to pick on each other about, but I wouldn’t say we disagree. Paying back family loans. Okay, maybe we’ll come back to that.

Brian: We got a fight on that.

Rebie: Next question. What’s you and your clients’ favorite time-saving expense? Landscaping, meals, cleaning service, vehicle maintenance, et cetera?

Bo: I mean, it’s landscaping and house cleaning. I think most often it’s house cleaning because very few people really enjoy the nitty-gritty of that. Some people actually get utility and derive satisfaction from doing yard work, so they don’t want to outsource that. But I think a lot of folks when we see them buy back their time, it’s those folks in the messy middle that can have someone else come in and clean their house so they can focus on the other important things in life that matter to them right now.

Brian: How impressed are you?

Rebie: That was very good. Right up to the wire. He’s a professional. I’m just entertainment.

Bo: Education and entertainment. You get both here.

Rebie: Next question. Counting unreimbursed HSA eligible costs towards an emergency fund. What do you think of that?

Brian: I mean, it is a break-glass situation, but I wouldn’t. I think in the beginning of your journey, it’s okay. We’re probably going to disagree on this because I want you to get past that and then get to Roth and building assets, but it’d be ideal if you have a true emergency fund.

Bo: You said you have unreimbursed medical expenses. That means the HSA dollars are likely still invested. If your dollars are invested, that’s not an emergency fund. Emergency funds need to be in readily available cash sitting there.

Brian: You did better on the SAT than I did. See, your reading comprehension is better than mine. Well, look at you now. I didn’t read the fine print like he did. We can come back to that one again too.

Rebie: Next question. I’m 21 years old. I live at home with parents and work full-time and pay for school out of pocket. Should I pay off my truck debt at 6.9% first or open a taxable account first?

Brian: 6.9%. How big is the loan? I’m going to assume that you’re inside the confines of 20/3/8. If you’re inside the confines of 20/3/8, I would argue that 6%, even though it feels high, is not incredibly high interest debt. I would work on building those dollars elsewhere.

Bo: Yeah. But I’d definitely have the debt extinguished before you move out of the house. Just because, I mean, if you’re living at home, you should be saving like 60%.

Brian: So you’d rather him pay off the truck than invest?

Bo: No. No, I’m not saying that. I’m just trying to get motivation. I’m just trying to give motivation. Let’s let’s go back to our 21-year-old home-living guy.

Rebie: I’m rusty. Last but not least. According to the Know Your Number calculator, we will have sufficient assets to retire even if we stop contributing. Should we reduce our savings rate and divert funds towards abundance goals?

Brian: How old are they? They didn’t say. That’s the only thing. If you’re in your 20s or early 30s, I get nervous because you haven’t had enough time to truly build the foundation. You can manipulate calculators. But if you are, you know, 40 and beyond, then yeah, you probably can use this as, okay, because you probably truly are in step eight of the Financial Order of Operations.

Bo: It sounds like you were describing coast FIRE. The Know Your Number calculator is not a replacement for a financial advisor. Someone should actually stress test a plan before you make such a gravitous decision.

Rebie: Ooh, we’ve got to come back to that one. We’ve got to come back to that one. 25 seconds. I gave you no time. I feel a little guilty on that one. Know Your Number is a fantastic tool, but this is a very important thing. I closed you on that one. I did not mean to. We are about to have a very exciting “Maybe It Does Depend” segment because we have several questions.

Brian: Goldfish. I’ve already forgotten every one of the questions.

Rebie: First one we said we wanted to come back to.

Brian: You’re the goldfish of the Money Guy Show. Just swimming around happy.

Bo: There’s some accuracy to that. It’s okay.

Rebie: You know Bo can’t say that. The swimming part kills him. We now have video evidence, brother. You can’t say it. Look at that.

Bo: That is me just treading water, creating content.

Brian: He did admit that. Look at that. This is 50 seconds and you almost drown. Look at that. That’s just honestly, he’s not naked. It’s like a team guy right there. Love it. Love it. Love it. This is what happens when I go on vacation.

Maybe It Does Depend (47:50)

Brian: Let’s dive back into some of these questions and the nuance around it. First one was the 35/25 rule is great for home ownership, but could we adapt a similar rule for renting?

Bo: Oh, this is just a piece of advice. You can write this in pencil because it’s my opinion. When it comes to renting, I’d be careful allowing yourself to go all the way up to 25% to rent if there are lower cost options out there available. Me and Brian navigated this when I first moved to Tennessee. There was a really nice apartment complex. Me and my wife, we sold our house in Atlanta, we’re going to move up here, move into an apartment, and we had these options. There was a really nice apartment complex. Would have still fit inside the 25%. But it was expensive. Like not in today’s dollars, but back then it was very very costly. There was another apartment complex that was significantly less. It was like 60 or 70% less expensive and still very nice. Looking back on it, I’m so glad I did not pay that premium to be in the nicer apartment with the higher rent. Even though it still fit inside the affordability, creating that margin, allowing me to save up to be able to fund other goals. If you’re buying a house, I think 25% is great. But when it comes to strictly renting, I’d be careful going up to the max just because you can.

Brian: Can I give a counter though? Renting for a family, and if you’re renting for a family in an average or high cost of living area, you’re going to need the 25%, right?

Bo: Here’s the thing. 100%. It’s okay to go there. I don’t know. I like what you’re saying, but then I was like, is it realistic? That’s why I’m trying to go on the other side of grace. You know, you’re probably in this time with housing so expensive, most people are going to fill up to 25%.

Brian: But Bo does have a point in the fact that, look, that apartment complex he was considering up here, they had like granite countertops, they had like 10-foot-tall door frames, they had all this stuff they were bragging about. And Bo and I, he showed me this place and I was like, “Dude, what are you doing? Are you trying to impress people with this apartment?” But I do think in this day and time, most people need a little more grace in their housing allowance because the 25% gets eaten up really quick. On your Venn diagram of your needs and your wants, just make sure when it comes to housing you are very very clear on that. I need to be safe, I’m going to concede that all the time. I may want granite countertops. I think those are different. And you need to be true to yourself, if you have other financial goals you’re going to try to be building towards.

Rebie: All right. Somebody asked what’s the biggest thing you disagree on in finance and you started the 30 seconds like we don’t disagree on anything, and then at the very end you listed like a handful.

Brian: I mean, we did have a clip recently go off because Bo felt like, you know, if you live at home and you borrow money from your parents, treat it like it’s a lender. And I was like, “No, family money, you probably should pay back, you know, depends on the parent circumstances,” was my opinion.

Bo: Yeah. Okay. So here’s what I learned from that. You can lend Brian money because it’s gonna ache his soul until he pays you back. Bo might keep your money for a while. Yeah, if you’re in a great situation, right? Like you know what I mean? It’s probably true.

Rebie: All right. The next one you said you wanted to come back to was about counting unreimbursed HSA eligible costs towards your emergency fund. Brian, you said a lot. Bo, you corrected him.

Bo: What I wanted to communicate that corrected him is he was like, “If your HSA dollars are sitting in cash, then that’s okay. You can consider that part of it.” But most people when you have unreimbursed expenses, that means that you have the HSA dollars, they’re out there working and growing for you. If you have money invested working and growing, that’s not an emergency fund. Even though you can go get to it tax-free, you cannot necessarily get to it loss-free in Q4 of 2018, in 2022, in 2008, fill in the blank. Those are moments when the market is down. If you had to get to those dollars, you’re going to have to sell at depressed prices to go get them out. If it’s in cash, you can do it. But if it’s invested, it’s no good.

Brian: This is one of those hacks when I think about my early journey where your broker is a joke, but you’re still trying to get money in those very small restricted contribution accounts like your Roth IRAs, your health savings accounts. If you get to a point somewhere between January and April and you have the ability that you could put the money in those accounts to get credit for making it and keep them in cash for a little bit of that time, and then you’re hoping you backfill your emergency reserve, so then you can actually go invest the health savings account, you can go invest the Roth IRA, I’m okay if people do that. Because I’ve been there, done that, to where you’re like, “Okay, I have until April to fund these accounts. Let’s put it in there, keep it in cash. Because if I got in a really bad pickle, I could always get my initial contribution out of the Roth, I can get my HSA money reimbursement out.” That’s okay. But you were right. If the money is invested, it’s not really cash. That’s not emergency reserves. That’s a good clarifier.

Rebie: Next one to come back to was the 21-year-old living at home who had the 6.99% truck debt, or his other option was opening a taxable account. And again, assuming it falls inside the 20/3/8, I’m going to argue pay it off on the 20/3/8 timeline and get those dollars working for you because you’re 21 years old. You made sort of this throwaway comment, “Well, yeah, but I want the truck paid off before he leaves the house.”

Brian: Here’s why I say that. When you live at home, you might have a savings rate of 50 or 60%. And when you get to a 50 or 60% savings rate, after you’re doing 25 or 30% for saving for the future, you might say, “What would be the harm in just going ahead and extinguishing this debt?” That’s the only reason I said that. You might have that debt paid off even sooner.

Bo: Sure. And once you get above a 25% savings rate, you get to fast forward in the Financial Order of Operations. You get to do what you want with your money. You’re saving above 25%, you want to pay off low interest debt and be mathematically sub-optimal, that’s totally fine. There’s no issue with that. It’s for folks who are not at that stage, you need to be a little bit more careful about it.

Rebie: And then last but not least, the Know Your Number calculator. If you don’t know what we’re talking about yet, go to moneyguy.com/resources. It’s a brand new retirement calculator, free for you to go play with, learn from. Go check it out if you haven’t. But this person said it told them that they could retire with the numbers they put in.

Bo: The Know Your Number tool is incredibly helpful. It’s supposed to give you an idea of where you are and where you should be. But I would never tell someone, hey, based on the output this gives you, design your life around that, because it’s not a full financial plan. It is not stress tested. It’s not looked at your specific situation. Before you make the decision to do something huge like leave the workforce or stop saving or really back down your savings, you better make sure that you’ve stress tested it and you’ve measured two, three, four, five, six times before you do that. We did a Making a Millionaire episode with Danielle where she had arrived at this conclusion that she was going to be able to coast FIRE, she’s going to back down her savings right now, she was going to be fine. And when we actually did the financial advisor work of back testing and stress testing it, what we determined is yeah, she had done enough work to cover the bridge at the first part of FIRE, but she did not get to the second part of FIRE. She had not saved enough and she was taking her foot off the gas too early. If you go through the Know Your Number course and it tells you that you can do that, that’s a good indication for you. Okay, now I need to do the second step. Maybe that second step is getting a financial advisor. Maybe that second step is getting a second set of eyes. Maybe the second step is me figuring out how do I do Monte Carlo simulations? How do I model out what our vacation’s going to look like? What healthcare is going to look like? How often we’re going to replace cars? What sort of gifts are we going to do for kids? How are we going to pay for weddings? All of these things that can change. You want to have that stuff fairly granularly figured out before you make a huge decision like cutting your savings rate, especially if you live inside the wealth window.

Brian: Well, I think you’re exactly right, but age does have a determining factor. If you’re 25 to 35 years of age, they are 36 and 32 by the way. So they’re still young in my eyes, but it is one of those things where it’s early enough that you can get some false readings just because of your age. That’s why they’re 36, so it’s not necessarily for them. But if a 28-year-old does this and does a wealth multiplier calculation with 30 years of growth, you can get to some distortions just because the time and the return are doing all the heavy lifting. But somebody who’s 36, it starts to take shape. And then definitely post-40, definitely post-45, you’re getting to the point where you really should probably get a second opinion on that. Know Your Number tool is a great signal. Like, I don’t see it as I’m going to make a huge life decision off of this. Like it’s a very valuable signal. So to the couple that asked this question, all right, that’s signaling that you’re doing something right.

Rebie: So like Bo said, those are some next steps that you can consider. I think it’s super important just to specify that just one calculator isn’t a full financial plan. That’s right. I don’t want this to end.

Brian: Can you give us one more question?

Rebie: Let’s do one more. Something a little more fun than that. Let’s see. We’ve got one from Ally up next.

Q&A: I’m 28 and Bought Bonds in My Roth IRA — Should I Sell Even at a Loss? (59:37)

Rebie: It says, “I’m 28 and when I started investing in my Roth IRA, I bought bonds that make up 7% of my Roth portfolio. Now I realize I’m probably too young to be investing this high in bonds. Should I sell even if at a loss?”

Brian: Yes. So a lot of times, okay, we can’t give specific investment advice, but a Roth, you realize how precious, you are Gollum going “my precious” with your Roth IRA. And look, we’re actually the people telling people to buy bonds, but not in the Roth IRA. We lost the plot on that a little bit. And maybe not a ton of them when you’re 28 years old. Again, we don’t know your unique risk profile, risk capacity, all the different variables that go into that. But the analogy I always give when someone has an investment that’s at a loss, they bought something, whether it’s a stock, bond, mutual fund, index, whatever, and they always ask the question, hey, what if it’s at a loss, should I sell it? I’ve always heard I don’t actually lose money unless I sell. And that’s not exactly true. The analogy I give is, imagine you were riding through a valley, right? You’re riding a bicycle through a valley and you get down to the bottom of the valley and one of your tires goes flat. Here’s what you would not do. You probably wouldn’t ride that bike with a flat tire back up the hill before you change and put a better tire on. It might very well be impossible. What you’re going to probably do is you’re going to figure, okay, even though I’m at the bottom of this valley and I’ve got this flat tire, I’m going to get something in there, I’m going to replace it with something that’s going to give me a more effective, more efficient, higher likelihood, higher probability of getting out of this valley in a very effective manner. And that’s what we do when we look at portfolios. A lot of us subscribe to this sunk cost fallacy. “Oh well, I’ve ridden this thing all the way down. I’ve got to wait for it to come back and then I can change.” If bonds, fixed income, whatever investment is in your Roth is not what makes the most sense for you right now, one of the great things about selling inside a Roth is there are no tax consequences. It’s really easy. It’s a low-cost transaction to do. You might want to go ahead and right that ship today so that you have a better, more fitting portfolio for where you want to go and where you want to be in the future.

Bo: By the way, Ally, you’re obviously welcome to this wonderful, wonderful world of finance because I can tell just the fact that you opened a Roth is very powerful. But then you put bonds in it and it shows you’re still on the learning side of things. I want to go ahead and prepare you for the next thing that’s going to happen. Because you’re going to listen to this show, you’re probably going to take action, go buy an index fund or an index target retirement fund if you don’t want to make the decision of how to invest it. But the market’s going to have some volatility in the next few years. Keep staying the course, because that’s the part that breaks my heart when brand new investors start investing and then they maybe lose 10, 15, 20, 25% because the market goes down. Just grin and bear it and even invest more on top of that same Roth account. And I promise you, your future self, what feels risky in the short term in the long term can be a tremendous wealth builder. And what feels safe in the short term can actually work really against you in the long term. And that’s what I always feel so sad for. New investors and I’ve had, you know, friends and neighbors who are new to the country and they figure out about investing and then they reach some volatility and they quit. And the compounding growth doesn’t work unless you can stick with it 10, 15, 20-plus years. And a lot of new investors quit before the good stuff comes just because of the volatility. That’s the test of discipline that comes. It’s that fear and greed battle that all of us humans encompass every year that we’re investing. And that’s the part, you have to endure the risk so you can get the long-term reward. And I know that wasn’t part of your question, Ally, but I just want you to be educated on that so you can bear it when it comes your way, because it will happen. You’ll remember that I had this conversation with you.

Closing (1:03:43)

Rebie: Good stuff. Don’t forget, go to moneyguy.com/survey. Take part in our survey, shape the show, tell us exactly where you are in your financial life, because that is only going to help us make better content, answer even more of your questions, speak to you where you are, your pain points. We can only do that to the best of our ability if you tell us about it. And that’s what this survey is all about. Go to moneyguy.com/survey. Share where you are in your financial journey. We would love for you to be a part of that. It’s fun having the whole band here together. It’s awesome.

Brian: This is a lot of fun. We got a full day of recording. I woke up and I had a little trouble sleeping last night because I was so excited. Like Christmas. You know, is Santa going to come? That’s what I was feeling. So thank y’all for showing up. I mean, I am so thankful that we get to do this with you guys every week. I hope you can tell the passion that started this show in 2006 was I always wanted to be a school teacher. And you guys have let this grow so far beyond that because we reach millions of you each month and we don’t take it for granted. So thank you for the respite of taking vacation, making memories with my family and friends. But man oh man, do we love creating this content so you can be better with money. I’m your host Brian, joined by Mr. Bo, Rebie, and the rest of the crew. Money Guy team out.

The Money Guy Show is hosted by Brian Preston, CFP®, CPA and Bo Hanson, CFA®, CFP®. Brian and Bo are partners with Abound Wealth Management, a registered investment advisory firm regulated by the Securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice. All investments involve a degree of risk, including the risk of loss.