How She Built $380k by 38 (Without a Six-Figure Job)

Introduction: Single Mom Saving 29% (0:00)

Bo: I want you to be able to focus on doing the stuff with your son and creating the memories and doing the stuff now because yes, it’s great and wonderful to one day have a huge pot of money sitting there waiting for you, but you don’t want to look back and say, “Man, I wish I would have.” Because your 9-year-old is only going to be nine once. I don’t want to sacrifice getting to create memories and doing things today just to have some slightly bigger pot of money later if I know that I’m already doing the stuff that I’m supposed to be doing. And I think you were in that same exact place.

Rachael: So, I’m from Littleton, Colorado. It’s like 20 minutes outside of Denver. I am a single mom to an almost 9-year-old.

Bo: Oh, nice.

Rachael: And I do tech writing for an engineering firm.

Bo: Tech writing for an engineer. What’s that mean?

Rachael: Basically, I tell them where to put their commas.

Bo: Sometimes I do tech writing for a financial planning firm every now and then.

Brian: It used to be in the past for one specific person.

Bo: That’s awesome. How long you been doing that?

Rachael: It’ll be 3 years in March.

Brian: You’re 38 years old. You let us know that you make about $83,000 a year and I think your total net worth is like $380,000. So why are we here today? What’s the thing that we’re going to be talking about today? What made you decide you wanted to come on Making a Millionaire?

Rachael’s Goals and Concerns (1:22)

Rachael: I really like your guys’s ideology on money and I wanted to see if you guys felt like I was on the right track to retire comfortably. I am hoping if you feel that I am on track that maybe it’ll make me feel more comfortable to spend money on bigger things because I have a problem with that.

Bo: Tell us more about that. What’s the problem and what kind of stuff are you not spending money on?

Rachael: Like vacations with my son or to do home improvement projects—maybe not by myself, to hire somebody to get them done. I’m just afraid I’m gonna spend a bunch of money and then something is going to happen and I’m not going to have that anymore.

Bo: So you kind of hold on to it for fear of the unknown unknowns that are going to come your way.

Rachael: Yeah.

Brian: Do you feel like currently you’re ahead of the curve, behind the curve, right where you’re supposed to be? What’s your gut?

Rachael: If the curve is the normal person my age in America, I feel like I’m ahead of it.

Brian: You say that with a question. The way your voice just dropped, you didn’t sound like you had a lot of security with that.

Rachael: Well, that’s kind of—I kind of wanted more of a personalized touch because the calculators can only go so deep. I feel like I’m doing a good job, but I want to know if I should be doing more or if I can take my foot off the gas a little bit.

Investment Portfolio Review (2:33)

Bo: Let’s look at what you’ve done so far, because again, 38 years old, that’s not old. When we look at your investment portfolio, we can see that right now you have a total amount invested of $140,000. In your traditional 401(k), you have about $19,000. You have about $10,000 in a Roth 401(k), almost $80,000 in a Roth IRA, which is awesome. You have a ton of tax-free assets, and then about $33,000-$34,000 in a traditional IRA. So, from a pre-tax tax-free standpoint, you’re in a fantastic spot. So, obviously, I would imagine to be able to get to this level of assets by 38, you must be a pretty good saver.

Rachael: I was really fortunate to get a job right after my son was born for somebody that I nannied for in college. That’s how I put myself through college. He gave me a 10% bonus at the end of every year and 10 grand in cash that he let me do whatever I wanted with. So I put them into the retirement account. After the first year, I spent it on a car and I regret that. But after that I paid off my student loans with that money and then I put the rest into those IRAs that I started. That’s why they’re so large.

Bo: 10 years—and you said that was like 10 years ago, right when your son was born. And it seems like that savings behavior has stayed pretty consistent because when we look at your savings right now, you’re absolutely crushing it. Right now you have 12% going into the Roth portion of your 401(k). You get a 6% employer match.

Rachael: It’s actually 150% up to 6% so it’s actually 9%.

Bo: Oh, you’re getting even—so it’s even better than what we’re modeling here. So we’re at 12% plus 9% and then you’re doing your Roth IRA maxing that out at $583 a month. So that’s another 8%. So I’m going to do this math. Brian, check me on this. That should be like 29% savings rate. 38-year-old, $140,000 in investments, saving almost 30%.

Brian: All the models are telling you you’re ahead of the curve. But yet your voice—there has to be something that’s working in the background that’s just saying it’s not enough or concerns. What is it?

Money Mindset from the Past (4:39)

Rachael: I think it’s just some experiences that I’ve had throughout my life with my parents taking some financial risks growing up and then they crumbled and I just want to be prepared. And I feel like my son’s my only one and so I want to leave him a good legacy. He doesn’t have to share it with anybody but I’d like to be able to help him when he’s ready because it’s getting harder. I think it’s not the way that it was when I was younger.

Bo: Your past with money, you’ve seen how maybe not making sound financial decisions didn’t play out well and you want to kind of flip the script on that. You want to do it differently than perhaps maybe it was modeled for you.

Rachael: Completely. Yeah, I might be overcorrecting, but that’s another reason too is because I save so much money, I’m wondering if I’m doing my present self a disservice because I’m too thrifty.

Putting on the 3D Glasses: Retirement Planning (5:29)

Brian: We always say put on your 3D glasses. Let’s go ahead and give you a little more confidence by actually throwing it through the 3D glasses to kind of see how that’s played out.

Bo: One of the reasons that we’re able to help people—clients—come up with clarity whenever they face any large life decision whether it be “am I saving enough for retirement” or “should I change jobs” or “should I move” or whatever—we like to put on the 3D glasses. And in retirement planning we do the exact same thing. So, we said, “Okay, let’s take Rachael’s current investments and let’s take her current savings rate and let’s say, okay, what’s the dream plan look like?” What if she does this and she does it from 37 all the way out until age 65? And let’s say that in the dream scenario, she can annualize 10% rate of return. Let’s let the return be the variable we affect here. If you can just make 10% on your investments and you can do that consistently for the next nearly 30 years, your $140,000 plus that savings rate—and by the way, ours is even a little muted because we model 26% savings. It’s actually 29 when you consider the employer match—you get to like $5.6 million. Oh, you smiled. That just immediately when I said that—how’s that make you feel? Give me some reverberation feedback on that.

Rachael: It feels good. I definitely think I could work with that.

Brian: Well, it’s even better because you get to bring it back to present value to say, “Hey, what does this mean from a cash flow in retirement if I had to model it?” I mean, it’s close to a hundred grand a year in pre-tax income if you bring it back for today’s dollars. How does that feel?

Rachael: It’s more than I make now.

Brian: Ding, ding, ding, ding. Yeah, that’s exactly. So this has to feel pretty strong that you’re ahead of the curve for sure. Now, do we think we’re gonna make 10% every year, though?

Rachael: No. And that’s another thing, too. You put in the variables—we could have another crash. I’ve already lived through a couple.

The Doo-Doo Scenario (7:21)

Bo: Well, let’s go through that because obviously—I mean, so you mentioned a crash and obviously at 38 years old, you were there for the great recession likely as an investor early on in your career. You were there for the COVID pandemic. You were there for fourth quarter of 2018. You were there for 2022. So, you’ve seen some volatile markets. But let’s say that over the next 30 years, maybe it doesn’t manifest to make 10%. What if we did have—we’re going to call it the doo-doo scenario. What if you only made 6% annualized? Again, exact same starting value, exact same behavior, something outside of your control. That’s what makes it the doo-doo part, and you only make 6%. Even at that, the $140,000 plus that savings rate get you to a portfolio retirement of almost $2.4 million. Okay, so that’s significantly and substantially less than $5.6 million. But how does that sound? $2.4 million.

Rachael: I like the first number better. I’m not going to lie. I mean, I wouldn’t have a mortgage anymore. I wouldn’t have a kid to take care of anymore. I mean, of course, I’ll always take care of him. But hopefully he has flown out of the nest at that point. Yeah, I could probably make that work, too. Things get so expensive. Colorado is expensive.

Bo: I want to remind you this is $41,000 and this just assumes a sustainable 4% withdrawal rate. What that’s showing is it’s kind of like living off the interest. I never actually buy into the principal. So, I’m able to kind of live off the interest for all of retirement. Well, this doesn’t factor in any other sources of income like Social Security, which could very likely be there for you. So, there’s a good chance even a portfolio of this size plus other outside resources you may have like Social Security or other things that happen between now and then, that’s pretty solid. Even in the doo-doo scenario, it looks pretty good.

Brian: But it still gives you a little pause though because it’s less than you currently make and you start thinking—I know I would do that myself—I would internalize it and be like I’d at least like to cover a lot of my current expenses. Now you did say some mitigating factors there. Not going to have to pay for your son anymore. You’re not going to have to pay for the mortgage, but still we think there’s room for improvement on that because that’s one that I would not feel comfortable letting my foot off the accelerator at $41,000. But the good news is we have the down to earth plan next.

The Down to Earth Plan (9:39)

Bo: That’s right. One of the things we talk about on the show all the time is wealth multiplier. And one of the beautiful things about you being 38 years old is that you still have a lot of time for your money to work for you. And your money can still be pretty powerful. So we said if we just use our wealth multiplier assumptions, what do we think is probably a down-to-earth reasonable rate of return for someone your age to expect on their portfolio over the long term? And we would say 8.3%. Right? That’s just kind of what we use for wealth multipliers. We said for a 38-year-old, let’s apply that here. Again, same starting value of $140,000, saving the same amount, but if you can annualize right around 8% per year, you get to a terminal portfolio at age 65 of almost $4 million, $3.85 million. And we feel confident that a $3.85 million portfolio can very easily generate about $67,000 in annual income for you. Great. So now, if you think about math, your current income is $83,000. And a lot of the rules of thumb say that you should shoot for like an 80% income replacement. The portfolio by itself is replacing about 80% of your pre-tax income, not even factoring in Social Security and other things that might change. So, in our down-to-earth plan, we think it looks pretty great.

Brian: You know, if you follow any type of our content, by age 30, we want you to have one time your income. By the time you get to age 40, we want you to have three times your income. With the down to earth plan, you’re actually on track to actually hit that metric as well. So that’s kind of a mile marker on the path towards financial independence. It says green light. We’ve hit this marker. Things are going well. Proceed and keep going. We see a lot of positives here with exactly what you’re doing. Give us some feedback on how that makes you feel.

Rachael: Oh yeah. I mean it makes me feel better. It’s more personalized, which there’s no face behind those calculators online, so I like that. And I like that the different variables because you’re not going to get 10% probably every year. Hopefully it won’t be 6% every year either. So I like that. It does make me feel a lot better. Makes me feel hopeful for what I can give my son for sure.

Future Changes to Cash Flow (11:48)

Bo: Well, and the only variable we changed here was rate of return, which is somewhat outside of your control. And one of the things you had mentioned to our producers is, “hey, okay, if I am behind the curve, if I’m behind and I need to kind of catch up, I do have some stuff that’s coming down the pipe that’s going to change. It might, if I’m not saving enough now, it might allow me to save a little bit more.” Do you remember having that conversation?

Rachael: Yeah, of course. I want to have a sinking fund where I can do some of the things that I feel uncomfortable doing right now. And then as I make more money I want to save more money and keep that 12%—it’ll go up assuming I continue to make more money.

Bo: Yeah. So we didn’t assume any increases in savings, any increase in pay. So even what we’ve laid down here with the dream plan, the down to earth and the doo-doo, they’re all relatively conservative. But you’ve mentioned to us there are some things coming down the pipe that could change in terms of what cash flow looks like. You mentioned that your mortgage will be paid off by 2045. And we know that right now that’s about $1,200 of principal and interest that would be freed up for you that you would then be able to apply and use elsewhere. And then there was this thing—a return of premium—about a $15,000 lump sum in 2038. Tell us what that is.

Return of Premium Life Insurance (13:06)

Rachael: So I have a life insurance policy where if I don’t have to use it—my son’s father and I both have one—when we get back like 90 some percent of what we put in. So I’ll get back around $15,000.

Bo: So it’s a term policy. You pay for a certain amount of time, but rather than those premiums completely going away, you get to receive those back at the end of the term.

Rachael: Yeah. Just a portion of them. So that’ll be when my son’s 20.

Bo: What was the thought process reasoning around doing a return of premium policy?

Rachael: Basically if my husband and I both got hit by a bus at the same time, we didn’t want our families to not be able to take care of our son. And so we each got a policy for $250,000 which would cover the house and then the other amount would be able to spend some money on my son to help raise him.

Bo: What was the—and we agree with that completely. We love the idea of having those protections in place. We’re huge advocates for life insurance. But specifically you did a return of premium policy. The way those work is you pay in premiums, at the end of the term you get some of those premiums back. But the reason why they’re able to give you some of those premiums back—

Rachael: I assume because we don’t use it, but I’m not sure.

Bo: Well, you don’t use it. You actually pay a higher premium amount throughout the course of the whole term. It’s a more expensive type of insurance than if you were to just go get purely term. And so I don’t know if there was some reason why you didn’t just buy a pure term policy, not worry about the return of premium and have a lower insurance cost. Was that something that you guys talked about or thought through?

Rachael: I think honestly, this is going to make me sound like such a novice here, but I think we just had somebody that my husband worked with and he came by and gave us his spiel and we just knew we needed to have something in place and we went with it. It was probably just an accident to be honest.

The Insurance Mindset Trap (14:55)

Brian: Well, I imagine it’s a mindset thing too because think about it. If you’re sitting across the table and you’re talking about this concept of insurance, if it’s traditional term, it’s just a straight up expense. Now, yes, it’s giving you protection. The thing I always remind people, and this is the thing that I’ll let Bo kind of go in deeper on—insurance is serving a very important purpose. It’s to fulfill the promises of replacing income or paying obligations because you can’t make it at that moment in time because you’re just not there. You haven’t had enough time going. Your assets haven’t grown to the point where—I think that people get lost. It’s the same thing is that when you have homeowners insurance, car insurance, there is a very valuable thing that it’s also providing with that. I don’t think it has to be just because you’re paying money and it’s a financial instrument, it has to be an investment. And that’s where I think people get the brain kind of has a hard time understanding. And the insurance industry has done a great job of marketing off of this of saying, “Hey, while you’re in here doing this great service to protect or fill in the gaps of what you need this coverage for, let’s actually get you some money back because we like investments.” And I think we’ve been pounded into us that investing is a good behavior. But you can see how this kind of gets skewed from an efficiency. Is this the best use of money? We’ve coined the term messy middle. When you’re young, your age, and you have children and you have things, your most valuable resource is your time, but also your most limiting factor is you just don’t have a lot of money laying around. So, every dollar that you can put to work or put with purpose while you’re young and have so much time has an exclamation point on it. So, that’s why I get frustrated when people sell products that yes, can serve some good, but also it’s the wasted opportunity, a misalignment of the efficiency of what those dollars could be. And that’s why I know Bo and I was so proud when I heard them talking about it because this all goes to Bo and the producers who were designing this behind the scenes. They were like, “Let’s make sure that we’re sharing with Rachael what could have been.”

Discovering the Whole Life Policy (17:03)

Bo: We saw this thing about how return of premium was changing in the future and coming back. And so we said, “Okay, well that’s interesting. She has an insurance policy. Let’s look at her broader net worth.” And when we look at it, we’ve already acknowledged you have $380,000 net worth, which is amazing. We love seeing the cash on hand at $30,000. We love seeing the investments. But then we got to the asset side and we said, “Okay, there’s her home. That makes sense.” But then there is a whole life policy and a term life policy. Term life makes sense. I’m assuming that’s the return of premium policy. But then there’s this whole life policy sitting on there. What’s that guy?

Rachael: It’s another policy that I have for my son that it has a special feature where you can choose to up the amount that you are insured for at different points in his life and you don’t need a medical examination for it. Then he is the beneficiary. So when he becomes older, he can leave it to his spouse or his child if he has children. And so it’s similar to one that my dad got out on me that I have. Lincoln is a beneficiary of when I die. He can’t roll it anymore.

Brian: So this is something you had even for yourself as you were growing up too.

Rachael: Yeah. My dad—I took over once I had my son.

Bo: Is there some reason why insurability was something you were concerned about for your son? Like being able to make sure that he was able to be—because he’s nine right now. So pretty low mortality insurable risk. Was there some reason you were trying to protect against the ability to get insurance in the future?

Rachael: I think it was because I had these dreams of putting money aside every month for my son when he was born and life just got away from us and we didn’t. And so I thought, well, this way he’ll have that at least.

Analyzing the Whole Life Policy (18:50)

Bo: I want to look at the details. Let’s look at your son’s policy because you were kind enough to share it with us. So we have some details around how it’s currently structured. You can see that right now it has a monthly premium of about $70 a month. That’s how much you’re paying into it every single month. The death benefit, the face value of the policy is about $100,000 and currently it has about $1,100 of cash value. Right. And I think you had mentioned something to the producers about, “hey, I understand that with life insurance policies, there’s the ability for him to borrow against it in the future.” Was that part of the thought process?

Rachael: Yeah, that was another side of it that was sort of a selling point when I was talking to my person about it.

Bo: Got it. A lot of people when they take on some sort of permanent life insurance or some sort of insurance that has a cash accrual benefit to it, that’s one of the things they think—”Hey, I can borrow against this and use it.” And so, when we look at how the insurance policy plays out from a guaranteed cash accumulation standpoint, we know that at age 18 based on what you’re paying, the guaranteed cash value would be about $3,400. Okay. By age 30, guaranteed cash value about $9,300. And then guaranteed cash value for your son in this policy is about $46,000 by the time that he gets to 65.

Rachael: I have a feeling you’re going to tell me this is what would happen if you invested it for him.

Brian: Well, let’s take out that—because we’ll get there. 9 years old, 18 years of age. If you just did 9 years, I did 9 years times 12 months times $68 a month. I mean, we’re over $7,300 just from premiums paid. So, and the cash value currently is what, $1,100 was the number? Almost $1,200. So, the delta only went up, you know, a little over $2,000 and we paid another $7,300. There’s just a very inefficient use. And you have to ask yourself, okay, well, where did that money go? Because cost of insurance on a child who’s healthy is practically peanuts. I mean, I’m always amazed when every year when I renew the insurance—the term insurance on my wife or even when I was in my 20s when I got my first term policy, they practically give you this stuff because they know statistically there’s just not a lot of young people fortunately that succumb to death. It doesn’t take much to insure that risk because it’s a large pool with very limited people who are actually making—who need this money paid out.

The Reality of Paid-Up Additions (21:25)

Bo: I don’t want to be disingenuous to the insurance companies because—we love insurance companies because here’s what’s going to happen immediately in the comments. We’re going to have a lot of insurance agents write us and say, “Guys, guys, guys, you did her wrong. Guaranteed cash value is not likely the way it’s actually going to pay out in the real world.” Yes, that’s what the policy says, but that’s not actually what’s going to happen. So again, you were kind enough to share the policy. So we kind of went into the nitty-gritty details and we’re kind of going to lay out what the brochure explains. The brochure says, “Hey, in addition to this, you can also have what are called paid up additions inside the policy.” So as you’re paying for the insurance and as this company pays out dividends, you can then use those dividends to increase the death benefit of the policy and also increase the cash value. This is a common add-on that people have inside of permanent life insurance policies to increase the cash value and increase the death benefit through time. And that is indeed what the illustrations you gave us showed—”hey, if we have paid up additions happening inside this policy, it can actually look a little bit better.” So, let’s show you what it looks like when we factor in the paid up additions. The picture does get a little bit better. By age 18, now your son would have about $7,200. That’s almost 100% of the premiums that Brian had calculated.

Brian: But I only did it from nine. If we actually did 18 years times 68 times 12, I mean, it’s close to $15,000. So, it’s still half is gone.

Rachael: I think I set this up when my son was I think maybe like four or five.

Bo: Okay. To be fair, 14 times 12 times—to be fair to your commenters, that’s $11,000. And you can see that if we again let it continue to grow out to age 30, it’d be worth about $22,000. Let it grow all the way out to retirement, it can turn into about $127,000. So yes, you are creating an opportunity where there is an asset technically that could grow through time, but we think potentially there’s a better way.

The Better Way: Buy Term and Invest the Difference (23:24)

Bo: We would argue that right now at age nine, your son likely does not have an insurable need on his life. Does he have a lot of income coming in?

Rachael: I wish, man.

Brian: Kids cost money, don’t they?

Rachael: They really do.

Brian: I’m going to jump into the morbid insurance salesman. The biggest risk you have with children is if they died prematurely, you have to cover their burial expenses. So, that’s a true risk, but you probably ought to build that into the emergency reserves. I mean, I know that’s easier said than done, but I’m just telling you that when we talk about the better way, I want to give—I want to go into the dark stuff that they’re going to use to sell these products as well. But remember, most life insurance is to cover obligations and income that’s currently needed—that you if you died prematurely, you would need to replace that in some type of lump sum.

Bo: So, if we’re trying to model out, okay, what would likely make sense for your son over the course of his life from age 9 to age 65, what you can see is that we think it would probably make sense from 8 to 24, let’s not necessarily have life insurance for him. What if we just took that amount that we were spending on life insurance, $70 a month, and we just put it in an account to grow and we just invested that for him and we did that? But then we want to be intellectually honest in our illustration. At age 25, let’s assume that he needs to get life insurance and let’s assume that he can go get term life insurance and he needs $750,000 of coverage. So $750,000 policy. We went and quoted a 30-year term policy and we didn’t even give him the best health rating. We gave him the second. We just gave him a preferred rating for $750,000. So from age 25 to 55, we’re going to take the $70. We’re going to pay for term insurance, whatever that costs, and then we’re just going to invest the difference over that time period. And then from 55 to 65, once that term policy ends, we’re going to go back to investing $70 a month. So when you actually look at what happens to the cash value, the accumulation value there at age 18, just doing this, investing that $70 instead of using it to buy an insurance policy, that account could be worth about $15,000. So then by age 30, that number could turn into $58,000. But this is where compound interest gets really, really exciting. From age 30 at $58,000 all the way out till age 65, it can turn into $1.4 million. And look, we assumed a 9% rate of return because if you just go out and buy the S&P 500 index or some low cost—for someone who’s 9 years old, that does not seem outside the realm of possibility. So when I tell you, okay, you have a product that could yield $127,000 according to their illustrations or you could implement a behavior that could potentially have a million and a half dollars—which one gets you more excited?

Rachael: Definitely the $1.5 million.

Real-World Milestones (26:14)

Brian: Let’s bring it back to the reality of this though because you know when he reaches 65 you won’t be here or even if you are right, it’s just so far in the future it’s hard to even conceive that. When he’s age 18 now we said it could have been $15,000-$20,000 depending upon when you started. If you needed it for education, if you needed it for a car, whatever life need, $15,000-$20,000 is going to go a lot further than that best case $7,000. Fast forward to age 30. You think about the first house down payment because that’s the other legacy thing I think—because you said something earlier. You said I think for younger people it’s getting a little bit harder. So you’re probably thinking about house down payments because that’s the biggest headwinds I see for young people is education and housing. So both of these things could be a part of that solution. But at age 30 if he wanted to have a house down payment, $58,000 is going to be one heck of a—that’s a pretty good head start. This is the power of going back to the moment. How do you maximize the fruit, the dividend that you get from that discipline? And this is the part that I feel like so much of the public, you’re doing the hard work. The hard part is the saving. Let’s actually just do the easy part. But the easy part, unfortunately, is one of the most important parts, which is actually putting the money to work. And a lot of people just skip that step or they don’t know about that step.

Bo: One of the things that people might say, “Yeah, yeah, yeah, but your son would have had life insurance coverage this whole time.” Well, even in what we’ve done here with buying term and investing the difference, your son would have had life insurance coverage from age 25 all the way out until age 55. And it would have been not $100,000. It would have been $750,000. So, it’s just a very different thing. You are solving a problem that exists for a real moment in time as opposed to solving a problem that doesn’t really exist on either one of those tails of that bell curve.

The Tax Argument (28:04)

Bo: The other thing that I think is important to mention is some people are going to say, “Yeah, yeah, but you can borrow against the cash value of life insurance tax-free. If you do this whole term and invest the difference thing, if you want to access that money, you’re going to have to pay taxes on that. It’s going to have capital gains.” And while that’s true, I would rather pay capital gains on $1.4 million or something along that line than only be able to borrow against $127,000. So even though there are likely going to be taxes, the outcome of the illustration is so much more compelling, I don’t know that it’s a cogent argument that would cause me to lean one way or the other.

Rachael: With the amount that he could get at different ages, can he access that or does he have the same rules that we all have with our investment accounts where he can’t get into it until 55?

Bo: No. So this would—our recommendation—it depends on the type of account you open whether you open an UTMA or UGMA account that’s kind of you’re the custodian until 18 or whether it’s in an account that’s in his name post 18 or if you did a custodial Roth. It would depend on the account structure. But most likely when people buy term and invest the difference they just set up a regular normal after tax brokerage account. For your son, it would look like an UTMA till 18 or age of majority, a custodial account and then it would likely just be an individual account in his name that he could access at any point in time for any reason. You just have to pay income taxes on any current income, capital gains tax, capital gains and income, any dividends or whatever it generated, but very accessible.

The Custodial Account Warning (29:32)

Brian: There is one risk though with these custodial accounts is that whatever the age of majority in your state is—because states have different ages of majority—the kids get it. And here’s I’ll go ahead and tell you the horror story with this stuff is if you use a custodian like Fidelity or some others, they group it off your Social Security number. So, when you get excited about your child turning 15 and getting their first paid gig like Chick-fil-A and you prime the pump by giving them dollar-for-dollar matching on whatever they want to put in their custodial Roth IRA and then you say, “You know what would be a great idea is if my daughter could every month go in here and look at this so you can see the value of investing and prime the pump here.” And then when you log in that first time with her to celebrate this moment and then you see that custodial account and you’re like “oh my gosh they show”—so you can’t keep secrets unfortunately with custodial accounts. Eventually when your children get older, they’re going to find out. But that’s okay. This is another learning opportunity where you as hopefully when your kid’s 14, 15, 16, you start talking about and you model what good money management looks like so that they’re not undisciplined and want to go buy a car or do something crazy when they get age of majority and have access to this pot of money.

Rachael: Okay. Yeah. No. My son saved up half for a new PS5.

Brian: I love it.

Bo: But that’s muscle. That’s strong. You’re showing him, “hey, if you save and you have a goal, you can save and work towards that.” That’s awesome. And if you can instill that in a 9-year-old—and my kids are around that same age—that’s awesome. That’s super.

Rachael: So, your guys’s recommendation is to maybe cancel that policy and use those—

Bo: I would do some research on it. That’s what I would do some research on that and I would do an analysis to determine is the best use if I’m going to be using $70 a month to do something for my son. Is paying into this policy the most optimal use of that or might it make sense to surrender that policy and divert that $70 a month elsewhere?

Rachael: Okay. I did just—I was rolling CDs for him and I just rolled it into an investment before like two or three months ago.

Brian: Simple index funds would do wonders too.

Are You Feeling Better? (31:32)

Bo: So as you’re sitting here you’ve got $140,000 invested. You’re saving 29%. You’re building for your son. You’re helping him learn how to make financial decisions. Are you feeling better about where you’re at?

Rachael: Yeah. And I’m super glad that you guys told me about the life insurance thing and showed me the other side of the coin because I really didn’t know any of that and you don’t know what you don’t know and so I appreciate that.

Bo: Are there other questions you have or anything else that you would like our take on that might be helpful and valuable since you got us right here in front of you?

Investment Diversification Question (32:03)

Rachael: Yeah, I guess the other question that I had was if there’s another way I should be investing. Like you guys saw, I’ve got a couple of accounts with different companies. Do I need to be diversifying anymore or am I doing it the way that I should be doing it?

Bo: Well, I think overall I think that the asset mix inside your portfolio is fine. I don’t know that you need to change that. And I love the way that you’re saving your income. I love that you’re prioritizing tax-free. You’re getting the employer match. You’re doing the Roth IRA. The one piece that you don’t quite yet have is that after tax bucket, right? You have your cash, you have your emergency fund, but you don’t have that third bucket. But I think that’s okay at your age. Now, as you begin to move closer and closer towards financial independence, and as you begin thinking about, “okay, well, when am I actually going to retire? When do I think I might actually use these dollars?” And you might say, “man, I really want to retire at 50 or 55 or something along those lines,” then you may be one of those people that gets to step seven of the Financial Order of Operations and figures that “okay rather than just doing my 401(k) and just doing the Roth perhaps I want to start doing an after tax.” But right now you’re following the FOO, you’re doing the Financial Order of Operations. I don’t think I would change a whole lot. And if anything—and this is something we don’t normally say—we just showed you that the down-to-earth plan works really really well and we were like 3% under what you’re actually saving because of your employer match.

Permission to Enjoy the Present (33:33)

Bo: I want you to be able to focus on doing the stuff with your son and creating the memories and doing the stuff now because yes, it’s great and wonderful to one day have a huge pot of money sitting there waiting for you, but you don’t want to look back and say, “Man, I wish I would have.” Because your 9-year-old is only going to be nine once and only be 10 once. And my wife and I are going—I’m going to start crying if I think about it. My oldest daughter’s 10 years old. We got like eight more summers. We got eight more Christmases. We got eight. And I’m just like the reality of that is hitting us. And I imagine you’re thinking the exact same thing. I don’t want to sacrifice getting to create memories and doing things today just to have some slightly bigger pot of money later if I know that I’m already doing the stuff that I’m supposed to be doing. And I think you are in that same exact place.

Rachael: That’s great. I appreciate that. Thank you so much.

Homework (34:20)

Bo: All right. You ready for your homework? Yours is pretty simple. First thing, I think it’d be worthwhile to revisit the life insurance. Do a little bit of analysis. Maybe call the agent, ask some questions, send a link to this video to the agent and say, “Hey, give me some thoughts on this.”

Brian: I’m sure he’s going to love that.

Bo: Yeah, he’s not going to like that or she’s not going to like that a lot. So, that’s number one. Number two, based on what you decide with the life insurance, determine if a custodial account makes sense for your son. It sounds like you already have one set up. Just determine should that $70 be redirected there. And then number three, I just wrote “keep doing what you’re doing.” Okay? But also, if there are things that you’re not doing, if there are things you’re not focusing on, if there are things you feel like you’re missing out on, you are on track, you are on pace, don’t feel like you have to miss those things and give those things up. Thank you, Rachael, for coming on today.

Closing (35:08)

Brian: Bo, if anybody else is interested in coming on Making a Millionaire, where do they need to go?

Bo: Yeah, if you’d like to be a guest on Making a Millionaire, you can go to moneyguy.com/apply. Or if you want to check out any of our free tools and calculators, you can go to moneyguy.com/resources.

Brian: Rachael, thanks again for coming on today. I’m your host, Brian Preston. Mr. Bo Hanson, Money Guy Team out.