Financial Advisors Versus the Internet

Financial Advisors vs. the Internet (0:00)

Brian: Welcome back to another react. What I’ve been told by the team is we’re going to be reacting to us versus the internet.

Bo: Brian, I am so excited to go toe-to-toe with what the internet has for us today. Let’s check it out.

Clip #1: Exotic Cars vs. Index Fund Investing (0:13)

[Clip] Owning a stock is boring unless it goes up in value. Like, think about my Murcielago. I paid $275,000 for that car. The doors go up. It’s worth $800,000 now. It’s a manual V12. I get to drive it. I get to take it to car shows. I get to meet people. You own a stock. Like ho ho. If that car was still worth $275,000, I’ve still had a great experience.

Brian Yeah. What about the maintenance?

Bo Well, I just —

Brian What about the insurance?

Bo: I don’t care if my stock goes up or down today. In all reality, when I go invest in a company, when I go buy shares in a stock or a mutual fund, I really don’t care what happens to the value today, tomorrow, or the next day, because it’s a long-term holding. I don’t need to show it off to my friends. I don’t need to ride in it. I know a lot of people who have lost their shirt buying and selling and trading cars. Often not the same with a cycle.

Brian: Exotic cars – that’s a hobby. It’s a cool hobby. What’s the retail on one of those? More than you can afford, pal. By the end of the day, I want my money, my army of dollar bills, to work harder than I do with my brain, my back, and my hands. The easiest way to do that is just buy the market through an index fund. Let it be passive.

Clip #2: Can You Really Write Off Every Vacation? (1:17)

[Clip] Me and my wife, we don’t go on vacations. We only go on business trips. I can’t write off a vacation, so why would I go on one? It makes no financial sense for me as a self-employed business owner to be taking vacations when I can justify every single traveling trip to be a business trip. If I think creatively ahead of time, I come up with a plan and I create an itinerary. This isn’t rocket science. If you go somewhere where you’re conducting business, you can make it a business write-off for you. I refuse to go on vacations when I know strategically how to leverage the tax code to take business trips every time I travel with my family, and you should too.

Brian: Bo, we have three ingredients to wealth. There’s discipline, living on less than you make. There is that turns into the margin or the money that gets invested, and then you give it enough time. His content is so entertaining to me coming from a tax background. And I want to give him credit. He has step number one, which is the discipline. This gentleman has the discipline – he doesn’t tell us solely he’s going on vacation to go visit the mouse or the wizard down in Florida. He’s on a business trip.

Bo: Yeah. Here’s what I think is so interesting about Carlton, and it makes me nervous, because I do think a lot of what’s so compelling about what he says is that there are glimmers of truth or shades of truth in all the things that he says. He said that you have to be really, really creative. In my experience, when it comes to the tax code, I don’t want to be super creative. There is black, there is white, and I try to live outside of the gray because it’s not worth the inherent risk of doing it the wrong way. So I would be cautious of taking that advice and applying it carte blanche.

Brian: Can you imagine you’re on your business trip with your family and your wife wants to post some beautiful pictures? Whoa, whoa, no. Babe, we’ve got a gig going here. No posting pictures of the mouse and the castle. This is a business trip. Don’t post that. Deductible.

Clip #3: Should You Cash Out Your 401(k) for Real Estate? (3:11)

[Clip] Do not put all of your money in your 401(k). Instead, do this. 401(k)s are great if you just want to set it and forget it, take the safe route. But if you want to actually make real money on your investments, there are plenty of other avenues to pursue. One of the options, and this is the one that I use, is cash out your 401(k). Use those funds as a down payment on a multi-unit property that you can house hack by living in one unit and renting out the others. That way you’re not just letting your money sit in an account that’s earning a low rate. You’re getting cash flow, you’re getting tax benefits, you’re getting appreciation, and you’re getting leverage options.

Bo: It always frustrates me when these internet experts act like all these things are mutually exclusive. If you want to do this, you can’t do that, so you’ve got to cannibalize this to do that. We love investing in real estate. House hacking is great, but it’s not something that you do at the cost of the other things that you are doing. And there’s a hierarchy. Some people would even call it an order of operations by which you should follow when it comes to making these financial decisions. But he just said, “You know what? Scrap that and jump right to the end of the plan.” I think that’s bad advice.

Brian: You could house hack with a 3% down payment because it’s your first house and you live in a portion of it. So if you buy a duplex, quadplex, or whatever, do the whole house hacking thing. But you don’t have to go raid your 401(k) that has the free money that your employer’s dumping in there. Make smart decisions. There is a better way to do money.

Clip #4: The Costco Hot Dog Affordability Test (4:36)

[Clip] Here’s how much you need to be making to comfortably afford the Costco hot dog with a 20 oz soda. The Costco hot dog with the 20 oz soda costs about $1.50 before taxes and fees. A standard down payment is around 20%, which means you should roughly put around 30 cents down. And after taking the final price of the Costco hot dog with the 20 oz drink, adding the 20% down, financed at 8% for a total of 60 months, you’re left with a total monthly payment of roughly 2 cents a month. So for only 2 cents a month, you could technically have a Costco hot dog with the 20 oz drink. But if you were to multiply this by 10%, you’ll find your monthly gross income. Then multiply this by 12 to find your annual gross income. You roughly should be making around $24 a year to be able to very comfortably afford this Costco hot dog with a 20 oz drink.

Brian: You know, this is super funny, but a lot of people do approach their consumption decisions this way. “Oh, I don’t know if I want to spend this much on that thing, but if I broke it down and I just paid for it over 19 months or over 36 months or over 60 months, man, it becomes a lot more affordable and a lot more palatable.” Just because you can afford the monthly payment does not mean that you can afford that thing. We should all just take a moment and pause on the $1.50 Costco hot dog, because what a genius business concept this is. Without a doubt it’s a loss leader. I think they’ve published that they lose money on these transactions. Look, I know hot dogs are horrible for my heart, but they taste so good. And these guys at Costco in their diabolical plan have put something that tastes so good but is so bad for me at such a low cost. I mean, are you kidding me? I get a drink and this huge all-beef hot dog. It gives me — I basically shake every time I go to Costco trying to talk myself out of buying it.

Clip #5: Is Paying a Financial Advisor 1% Worth It? (6:19)

[Clip] Here’s why paying 1% to a financial advisor makes no sense. I’m Tyler, a former financial advisor and portfolio manager, and I used to charge 1% and it made no sense. Number one, if you retire with a million bucks and you want to follow the 4% withdrawal rule, you take home $30,000 and your advisor takes home $10,000 every year. Number two, over 30 years, that 1% could cost you between 25 and 30% of your total returns. And number three, the worst part, most advisors invest you in the exact same index fund that you could buy yourself in under three minutes. That’s not advice. That’s an expensive subscription for handholding.

Bo: Two things really, really quickly. If all you’re doing is paying an advisor to go out there and buy index funds, we agree. Don’t do that. That’s why he’s a former financial advisor. Don’t go pay an advisor to just buy index funds for you. If that’s what you’re doing, you’re not getting your money’s worth. But if you have a holistic financial advisor looking at all the different areas of your financial life, even though they do use index funds, what should be happening is even if they are charging you 1%, the value that they add to your financial life should be greater than the fee that they charge. Of course, if all that’s happening is 1% is getting leeched off of your portfolio every year, that’s not a favorable trade-off.

Brian: This is no different than buying toilet paper at Costco. The bigger you show up with bulk purchases, the cheaper it all gets. It’s such a math crime because they run this 1% and they’ll get it to where instead of having $12 million in assets, they’re still taking 1% off of $12 million. No, that’s not the way it works. It gets cheaper and cheaper the bigger you get. But look, I get it. It’s easy to do a math crime and then make yourself feel better and then go sell some other product. At the end of the day, ask yourself who’s putting the interests of their clients first. That’s why I always say go check out our free resource, 8 Questions to Ask Your Financial Advisor. If they can’t answer them, you’re barking up the wrong tree.

When Should You Hire a Financial Advisor? (8:34)

Brian: Bo, I’m willing to bet there’s someone watching or listening who’s wondering if they should work with a financial advisor.

Bo: Brian, if I were going to answer that person on when it makes sense, there are really three times that we think it makes sense to reach out to an advisor. The first is when complexity finds you. What I mean by this is that your financial life has gotten more and more complicated and now you realize you simply don’t know what you don’t know.

Brian: The second is when you don’t have the time or even the desire to be the CFO of your financial life. Important stuff is falling on the back burner and you just don’t have enough time to put in the effort it takes to do what you need to do. And the third is when the gravity of your decisions is bigger than you feel comfortable navigating alone. Because of your success, $100 decisions start turning into $100,000 decisions. One tax decision or one bad investment move can literally be a six-figure mistake. Look, this is likely the first time you’re navigating wealth at this level. But we do this all the time. And having somebody on your team who’s done this a thousand times can help you do this more efficiently and give you incredible peace of mind because we can help you uncover your blind spots. If any of this sounds like you, just head over to aboundwealth.com or click the link below. We’d love to connect and see if we’re a good fit for you.

Clip #6: Ranking the Best Investment Accounts (9:55)

[Clip] Roth IRA – great account, but the contribution limits are tiny. Three. Traditional 401(k) — hear me out here. A lot of us build wealth here, but every dollar is taxable on the way out. Cash value life insurance — easy. Five. HSA — triple tax advantage when you use it for retirement healthcare. Taxable brokerage – definitely number one if you’re looking to retire early.

Bo: James, I don’t disagree with you a ton. I do have a little bit – look, HSA beating out Roth, I’m okay with, but I think I’ve got to move those into the one and two spot. Taxable brokerage at number three, because most people when they start out in their financial journey, we don’t want to start at a taxable brokerage account. We want to start with the Roth IRA, with the HSA, doing $50 a month, $100 a month — get those accounts growing because tax-free growth is so, so, so valuable. I agree cash value life insurance should be at the end. What was his number four?

Bo: Traditional 401(k). Yeah, but what about Roth 401(k)? If you’re getting free money, I’d argue that one’s got to be a little bit higher up. I love the way you have the first four ranked. We can throw the fifth one away — what are you doing? But I think I would have rearranged it a little bit, because if people start with a taxable brokerage account, they’re missing a lot of opportunity on the front end. Whether it be through employer matching in that traditional 401(k) or through building tax-free dollars in your Roth IRA, most of you hopefully are discovering this content in either your 20s or 30s.

Brian: And yes, you’re going to be capped out at putting around $7,000 a year in this thing. But the thing is, that $7,000 – depending upon what your wealth multiplier is, for a 30-year-old that’s 23 times – yes, it’s small contributions and small impact on your daily life, but huge results for your future self. Do not sleep on the free money from your employer. Don’t sleep on the fact that you can load up your Roth 401(k), your Roth IRA, and your health savings account. It’s almost like there’s something that can tell you — an instruction manual – what to do with your next dollar to live your best life. And it’s called the Financial Order of Operations. Just like math has an order of operations, so do your finances. And we perfected it.

Clip #7: Should You Pay Off Your Mortgage Early? (12:01)

[Clip] Hey man, nice house. Hey, if you don’t mind my asking, what’s your mortgage rate?

[Clip] Oh, we don’t have one.

[Clip] Oh, are you renting?

[Clip] No, we actually paid off our mortgage eight years ago.

[Clip] Really? In your 30s? Why?

[Clip] Well, we wanted to lower our cost of living so we didn’t need to work as much. After front-loading our investments until we hit CoastFIRE and paying off our mortgage early, my wife and I now work two part-time jobs instead of two full-time jobs. This allows us to have more time for our marriage, more time to spend with our kids, and more time to take care of our health.

[Clip] Huh. I never thought of it like that.

[Clip] When life costs less, you don’t need to work as much. Exactly.

Bo: All right. So we consider Andy a friend. I’m not going to say anything bad here. I will say money is nothing more than a tool that allows you to accomplish the goals that you have in life. And for him and his wife, one of their goals was financial independence, retire early, and being debt-free. So they prioritize the financial decisions they make based upon those goals. Where I sit in my position, I think if you have a super low interest mortgage in the 2, 3, or 4% range, for a young person in their 30s, it’s really hard to justify paying off that mortgage early when those dollars could potentially work harder for you elsewhere and give you the ability to be debt-free on a tighter timeline. But Andy’s done great. I’m not going to fault him. His plan worked for him. Even though I would argue perhaps it’s mathematically suboptimal, behaviorally it was perfect for him.

Brian: Andy’s been on our show and we’ve been on Andy’s show. I have additional context here, and that’s that Andy followed the FOO. He didn’t pay off his mortgage until he was already in Step 8 of the Financial Order of Operations, meaning he was already loading up and saving well beyond 25% in his Roth IRAs and his 401(k)s. He wanted to be debt-free that much sooner. I just want to make sure people who watch this content don’t become debt crusaders where they pay off the mortgage before they’re funding their Roth IRA, before they’re maximizing their employer 401(k), and before even setting up a brokerage account so they can do CoastFIRE and live life on their terms. Andy was also a hyper-accumulator of saving. They had a very good income, they made really good decisions, and they just prioritized being debt-free that much sooner so they could live life on their terms and own their time.

Clip #8: Dave Ramsey’s Roth vs. Traditional 401(k) Advice (14:27)

[Clip] My financial advisor is advising me to switch from contributing to the company’s Roth 401(k) to a traditional 401(k) due to basically my income level and the amount of tax savings that I would receive now.

[Clip] Wow, that’s okay. He sounds like somebody died. You need to get a new financial advisor that can actually do math.

[Clip] That was kind of my guess, but I didn’t know if there was any specific circumstance where that — yeah. So how old are you?

[Clip] I’m 40.

[Clip] Okay. And how much are you going to be putting into the 401(k)?

[Clip] I’ll basically be maxing it out.

[Clip] Okay. So you’re going to put in how much in dollars?

[Clip] About $24,000.

[Clip] Okay, we’ll call it $2,000 a month. If I put that in the retirement calculator, that says that you’re going to have at 65 — $3.1 million. Okay, let’s start at zero. I’m sure she already has something saved, but let’s say from zero. 25 years you put in $24,000. 25 years times $24,000. And everything above your contribution is taxable. So what was the number? $600,000. So he’s telling you to save taxes on $600,000 of the $3.1 million, but for doing that you get to pay taxes on two and a half million. Lovely.

Brian: There you go. Here’s the thing. When your tax rate is between 25 and 30% – and if you add your state and federal – we think that’s kind of the gray zone where you take into account what your age is and other things. But once you’re 30% or greater, especially if you’re somebody who thinks you’re going to leave the workforce anytime between 55 to 75, which is a huge window, because that’s right before required minimum distributions – what if you could leave the workforce? Let’s say, like myself, if I’m paying 40% to taxes, but then I could retire at say 60 years of age. I have 15 years before the government mandates me to take the money out. Now I don’t have all this earned income driving my tax rates way up. I could go from 40% to potentially 15%, 22%, or even 12%. We deal with this at the 12 or 24% marginal rates where we see clients drop from the highest 37% marginal rates all the way down to 12%, and they start doing Roth conversions. They legally get to manipulate the tax code. That’s good planning, because that spread between the 37 and the 12 – you got the compounding growth while you were in those peak earning years paying the highest possible tax rates, and then you got to convert it at a much lower tax rate.

Bo: I just think about for this lady – she’s 40 years old, she’s in a higher tax bracket. Let’s assume that she pays 32% marginal on the federal. We don’t know her state. If she puts that $24,500 into the pre-tax side of a 401(k), it’s going to save her $7,800 in income taxes. That’s enough money where she could go fund a backdoor Roth IRA. So not only is she saving the $24,500 in pre-tax dollars, she’s also building tax-free dollars via a backdoor Roth at $7,800. You can think about that tax savings in this year as like a 30% imputed rate of return. She can do that every single year. And just like you said, when she moves into a lower tax rate environment in retirement, she’ll be able to convert those dollars to Roth at much lower rates. This is the arbitrage here. I can either turn dollars into Roth today at a 30% tax bracket or I can turn dollars into Roth tomorrow at a 12% tax bracket. It’s a favorable trade-off. That current-year tax benefit is so, so valuable. It is difficult to walk away from. That’s why we do say for most people you start with Roth 401(k) contributions and you do that until your income hits that tipping point where the current-year tax benefit is so valuable that you don’t want to walk away from it.

Brian: Yeah. It pains me because Dave does such a good job of getting people out of debt. But this is one of those things where I think there’s a better way to do money. I would caution Dave here – he’s thinking about all the benefits of the Roth but not thinking about the tax arbitrage. We live in a progressive tax situation. The more money you make, the more taxes you pay. You have to take into account the full context of somebody’s financial life. If they’re in their peak earning years with peak tax-paying years, you have to ask yourself, is there going to be a period in the future where maybe they’re leaving the workforce at 50 or 55 where you can now optimize the tax planning for the long term? And that’s really the job of what a fee-only financial planner does. They not only look at what you’ve got going on today, your current triage situation of your financial life, they look at your future life and say, “How do we bring these things together so you own your time and live your best life today and tomorrow?”

How to Find Financial Advice You Can Trust (19:52)

Brian: Look, there’s tons of financial content out there on the internet and a lot of it is really, really good. A lot of people we looked at today are fantastic financial commentators. But when it comes to what you should do with your financial life and how you should make your financial decisions, personal finance is personal. That’s why we’ve come up with things like the Financial Order of Operations to help you decide exactly what you should be doing so that you can live your great big beautiful tomorrow. Guys, this was a blast. I felt like it was us nibbling on the edges, helping the internet know how to do life just a little bit better. There is a better way to do money as we already shared with you. Go to moneyguy.com/resources. Load up on the free stuff. We want you to live your best life and get there that much faster, because one day that success will create complication and we’ll be waiting right there with the front porch light on. I’m your host Brian, joined by Mr. Bo. Money Guy Team, out.