How to Adapt When Your Income is Cut In Half

Introduction: Meet Rachel (0:00)

Brian: Perfection doesn’t exist for anybody. You can have a lot of mistakes and there’s still tremendous margin for success to come out the other side. And I think that’s what we’re going to hopefully uncover for you today, Rachel, is as we go through this—yes, there’s a big step back with this big life change, but how do we make you fulfill those three big goals that we kind of uncovered, and also you come out the other side feeling much better and with purpose.

Bo: 45 years old. That’s right. $362,000 net worth. You make about $120,000 a year. Sounds like you were in a fantastic spot and it’s been just a super easy journey from just straight from where you were to where you are now, right? No problem. That’s the way it went.

Rachel: Yep. The good news is I don’t want to be a millionaire. So you guys, this may be a quick easy check the box. We’re done. Check. We’re out of here.

Bo: Why don’t you want to be a millionaire? Is being a millionaire a bad thing?

Rachel: I don’t know. Maybe.

Bo: Maybe being a millionaire is bad?

Rachel: I guess it depends on how you use your money.

Bo: Depends on what a million dollars means for you, right?

Rachel: Yes. Exactly. For me, I don’t think I need a million dollars to be happy. I know I don’t because I’m happy now and I don’t have a million dollars. I’m a public defender, kind of lifelong public defender. I love my work. I have two great kids.

Bo: And how old are the kids again?

Rachel: They are five and six, but six and a half—the halves are so important. So, I do not want to insult my daughter. My ex-husband and I got a divorce last year, about almost exactly a year ago. So, my financial situation changed markedly. You know, it basically is kind of cutting your income in half, but all your bills stay the same. So, I’ve just been trying to reconfigure this past year and kind of figure out how to manage what I have now and what needs to go and what needs to stay. And I have had some—I guess I want to think about how to do this year a little bit differently to prioritize some things that are important to me.

Life Before and After the Divorce (2:05)

Bo: What was life pre this huge life change, right? And then what has changed specifically around the financial stuff? Because I think you used the term “reconfigure and rebuild.” I want to dive into what was it like and then what is it like now? But what are some of these goals you have? Because you said, “Hey, I don’t need a million dollars to be happy.” Right. And we would agree with that sentiment that we recognize money is nothing more than a tool that allows us to accomplish the things we want to accomplish. It’s just a means to an end. It’s not the end itself. So for some people that’s a million dollars. Some people it’s much less. Some people it’s much more. And so we are in alignment on that.

Rachel: No, I appreciate that. And that’s why I’ve been drawn to your ideology because I think that resonates with me.

Brian: Well, it’s also-I mean our big thing is own your time. And to own your time, do you want to retire at some point?

Rachel: Yes.

Brian: We have to have an army of dollars somewhere. Y’all were in steps eight and nine. Am I getting this right? I mean we’ve come a ways back. So this thing had a cost to it.

Rachel: Oh yeah, for sure. Yeah. I mean I think…it’s just going to sound real spoiled. So, I’m just going to say it. We just didn’t really think about money. We just had it. Okay. And so, there was a level of just doing what we wanted. You know, we had everything we needed and everything we wanted. I guess that’s why I always question why people need more money because I felt like we didn’t have a ton of money, but we had plenty, you know, and so it was just different.

Bo: I think that’s really interesting because I think a lot of people go through that. They’re in a season or stage where maybe income is good, maybe expenses are low, maybe health is good, relationships, whatever that thing is, and then something happens. In your case, it was a divorce, sometimes it’s sickness, sometimes it’s job loss or a move or a change. And then all of a sudden, it changes and there’s like a mindset shift that happens. 100%. I started with this view of what it was going to look like and then something changed completely.

Rachel: That’s exactly what it was like.

Rachel’s Financial Goals (3:56)

Bo: I want to dive in. When it comes to finances, what are your goals? What do you want money to do for you?

Rachel: So, I think one thing I really liked about having money is when we saw something in our community that we thought would benefit from the money that we had, we just gave that thing money.

Bo: You mean like philanthropy?

Rachel: Yes. Exactly. Like if there’s something in our community that needs help that aligns with our values, we just give them money, you know? And it just wasn’t really a question. And obviously we had conversations about it, but it wasn’t like a question about if we had it. And I think in this past year when I was kind of figuring out budgets, one of the things that changed is my ability to assist in that way. And I love my community. I can tell people in Franklin are very proud of their community. I feel like that about my community, Waterloo, Iowa. And I just want to be useful in that way. And I feel like in the past year I have not done that in a way that I’m happy with.

Bo: Is being able to do more from a philanthropic standpoint. What I want to do is I want to revisit my budget and I want to figure out how I can cut expenses as much as possible so I can give as much as possible. Or is it I want to figure out how I can build a level of wealth so that one day I can write checks freely the way that I used to write checks freely. And neither of those are right or wrong. I understand what the goal is.

Rachel: Right. Well and I don’t know that they’re mutually exclusive either.

Bo: Fair point.

Rachel: I mean I think it would be great to do both but I think my immediate concern is helping now. How do I help now? And there are some institutions that I’m concerned will not remain if people don’t step up to help now.

Uncovering Additional Goals (5:30)

Bo: Well, let me ask you some questions then because a lot of times I’ll ask people, hey, what are your goals? And they’ll say this one thing which I love and that’s obviously the top priority. So I’m going to ask you about some other things, right? Do you want to retire one day?

Rachel: I sure do.

Bo: So I call that a goal, right? Like I say, one financial goal would be working towards financial independence. For your kids age five and six, do you have a desire or hope for one day them to go off to higher education and college and that sort of thing?

Rachel: Yes.

Bo: Is your intent that you would like to be able to assist with that or—

Rachel: Yes.

Bo: Okay. So we got—all right, we’re at more goals. This is an exercise we encourage everyone to do, right? Money is nothing more than a tool that allows us to achieve our goals. But we have to realistically list out our goals. And in the pursuit of our goals, sometimes the pursuit of one goal will impact our ability to pursue another. And so we kind of list all of our goals out and then we prioritize them. As we think about how we deploy our capital, we want to deploy it in the most efficient way to satisfy all the goals. Not funding one goal today at the expense of another goal tomorrow if we can avoid that.

Brian: When do you want to retire?

Rachel: I had kids late in life, so I feel like I’m in a weird spot because, you know, I’m middle-aged, but I have very young kids. My goal was to retire about the same time my son goes to college. Okay. So that would be when I’m 60.

Brian: Okay. So that’s an intersection point because we all have these inevitable dates that will happen. So retirement at 60. Education—you said they’re five and six. So we have 13, you know, 12 and 13 years. These are two things that will need to be taken into account.

The Journey Through the Financial Order of Operations (7:04)

Bo: Pre-divorce, what was life like? You said, “Hey, we didn’t really think about money a ton.” Were you diligent savers? Were you saving for the future? Like maxing out retirement accounts, doing that kind of stuff? Even if I remember correctly, maybe even prepaying mortgage.

Rachel: Oh, yes. Early on.

Bo: So, I would argue you were kind of in the step eight/nine phase of the Financial Order of Operations, right? Like when we think about it, you kind of made it past all the base level steps and you were there. Now this large life event has happened. Where are you now? Like if you had to assess, where would you say that you are in the Financial Order of Operations?

Rachel: Yeah, I’ve been thinking about that a lot. I would think I’m probably more at like four or five.

Brian: Got it. When you went through the divorce, did you just fall back from 8 to 4 or did you have to go all the way back to one?

Rachel: Oh, that’s a great question. Yeah, I kind of went back to one. I kept the house, but obviously I bought my ex-husband out of the house. Because I had saved so much for retirement, we had different levels of retirement, so I had to give him a chunk of money to even that out. So, really, he got all the cash and I had the house. So, yes, I was kind of starting from one. I needed to make sure I had enough for deductibles. I think I had like $2,000 liquid cash. I mean, it was like bare minimum.

Bo: You know, so often when people think about the Financial Order of Operations, they think about it as a straight line. I go from step one to step two to step three to step four and I just kind of track up this mountain. And perhaps that even was your journey initially, but then inevitably something happens. And in real life, when we see the way that FOO practically plays out, it looks a lot different. Like I’m in step nine for a bit, but then I went all the way back to step one, then now I’m slowly building back. And so we thought it’d be interesting—if we look at where you are now, your FOO journey kind of looked like this, right? Step nine, down to step one, but now we are beginning to build. Now we’re building back. We’ve got deductibles covered. We’re going to talk in a moment about your match which is a little bit different because of your vocation. You’re rebuilding your emergency fund. So you are squarely in step four. So we’re tracking back up the mountain. I just want to pause and say that’s okay.

Rachel: Yeah.

Bo: A lot of people get discouraged and frustrated. But this is what happens in life. And you were like a living testament to that happening and being okay.

Rachel: Totally. There’s a path out of that.

Brian: Perfection doesn’t exist for anybody. I mean, this whole book is full of mistakes and that’s what I think is so great is that you can have a lot of mistakes and there’s still tremendous margin for success to come out the other side. I think that’s what we’re going to hopefully uncover for you today, Rachel, as we go through this—yes, there’s a big step back with this big life change, but how do we make you fulfill those three big goals that we kind of uncovered, and also you come out the other side feeling much better and with purpose?

Rachel: Yes. No, totally. And I’m very proud honestly of the work that we’ve all done this year and I’m very proud of my kids. You know, it’s a change in how things have gone and I think we’ve done a great job. So, yes, I do not feel shame about having gone back, but of course, I want to keep moving forward.

Net Worth Statement Review (10:15)

Bo: I love that. We’ve already mentioned even with this large life event, your net worth is at $362,000. So, we look at your net worth statement. It looks pretty good. I mean, you said, okay, you’ve got about $22,000 in cash. You said that’s about four months of living expenses. Our goal is to get to six. In investments, you have about $232,000 broken up between a 403(b), a 457, and a 401(a), which is just all through the same employer that you’re working with. You have your primary home, which is worth about $349,000. So, on the asset side of the ledger, things look fantastic.

Rachel: Yes.

Bo: On the debt side, looks like you have two debts. You have your primary mortgage, about $179,000 at 2.375%. Wow. Great. Is that a 15-year mortgage?

Rachel: I wish it were. No.

Brian: What type of mortgage is it?

Rachel: It’s a 30-year fixed.

Brian: Oh, it’s even better, though. When I ask you—typically when I see rates that low, I always think it’s a 15-year because typically 15-years are about a half a percent cheaper than 30-years. So, for you to have a 30-year at 2.375%—did y’all prepay it? I mean, did y’all buy some points or something? That’s a low rate.

Rachel: No, we just got it at the exact right time.

Brian: Wow.

Rachel: And honestly, we talked about doing a 15-year that was 1.8%.

Bo: Holy cow.

Brian: You must have—I mean we watched the market pretty closely. When we try to choose the bottom of markets I think you y’all must have just stuck the landing perfectly.

Rachel: Exactly. Yeah. We really did.

Brian: That’s incredible. And you said y’all were prepaying. Y’all were paying the mortgage off quickly.

Rachel: Yeah. We were trying. And I know you guys are going to be like “that was not a good idea, Rachel. You should have been putting more money in savings.”

Bo: Well, we’re not about good ideas or bad ideas. We’re about optimal ideas and suboptimal ideas.

Rachel: I love that phraseology.

Bo: Do you still have a desire to pay off that mortgage?

Rachel: Yes, and I have been doing it. That’s my big question.

Brian: Wait a minute. I see a high yield savings account there on cash. What are you getting paid on that right now?

Rachel: 3.8%.

Brian: 3.8%. We have a delta there of about a percent and a half. By the way, there’s moments where you’re probably making 5% on that cash too, right?

Rachel: Yes. Yeah, I feel like I have anxiety related to debt. Like I just want to get out of it as soon as humanly possible and so I’m overpaying, but I understand my margins would be larger if I weren’t. And I may be able to meet my goals a little bit better.

Brian: You’re trying to do charitable work. Was it for the banks or was it for these organizations?

Rachel: Organizations.

Brian: Okay. I just want to make sure we’re clarifying here.

Bo: We’re going to put a pin in the mortgage for a second because you just said “I want to get out of debts as quickly as possible.” Your mortgage is not your only debt.

The $60,000 Loan from Sister (12:55)

Bo: You do have this other debt. There’s a $60,000 loan from sister. What’s that? Walk us through what that is.

Rachel: Yeah. So, that was part of the settlement piece in terms of, you know, you could do the qualified domestic relations order—

Bo: QDRO.

Rachel: That’s right. Very good. We elected not to do that. I did not want to fight about a QDRO. I just kind of wanted to wrap things up. And so that was our decision that I would just do a straight cash payment to my ex-husband rather than do a QDRO from my retirement account. My sister, God bless, she’s a lawyer who makes money.

Brian: I’ve never heard it said that way. That’s hilarious.

Rachel: Yeah. I mean, as a public defender, you have to delineate, right? So she was very generous and loaned me $70,000 so I could make that payment to my ex-husband.

Bo: And so you’ve already paid $10,000 in the first year.

Rachel: Yeah. And she was very—I mean she would let me take as much time as I wanted. Again, just anxiety about I don’t like that being there.

Brian: Are you paying that monthly? Are you paying it yearly or just when you have money coming in?

Rachel: No, we have just a setup through my account that she just gets $1,000 every month on the same date.

Brian: Does she prioritize you going through the Financial Order of Operations or do we need to lean heavily into making sure your sister is paid back faster?

Rachel: Yeah. No, she’s so kind. So, again, you guys are not going to like this. We originally had an agreement where I would pay her $700 a month and then once I figured out, okay, here’s where my margins are, I felt like I could pay more and so I wanted to. So, we changed the agreement and did a new amortization schedule. So, the goal, as it’s set right now, I would pay her off in spring of 2031.

Brian: But we can treat this as low interest debt. There’s not some asterisk next to it that there’s a time certain for relationship purposes.

Rachel: And this is not money that she—I’m guessing she doesn’t even really think about it at all, but it’s more like I think about it.

Brian: We’re going to get her in next month for Making a Millionaire.

Bo: It is an interesting thing just kind of thinking through where your goals are. You would agree that 3% is low interest, right? And you would even concede that on your high yield savings you’re making 3.8%. So there’s an arbitrage there. Not that we want to take advantage of the sister or anything, but there’s an arbitrage. But you did say, “Hey, one of my goals is philanthropy today, present day.” And we haven’t talked about retirement savings or anything, but just in my mind, well, it was $700 and it could have stayed $700. That would have freed up $300 a month for philanthropic purposes, right?

Rachel: Totally.

Bo: I just want to understand the mindset. You said, “I have one goal and my number one goal is to be philanthropic. I’ll be philanthropic today to the extent that I can,” but when faced with the opportunity to do that or get out of debt, you said, “Hey, I’m going to get out of debt more quickly.”

Rachel: Yeah, such a good point. There is some cognitive dissonance there, isn’t there?

Bo: Okay. So, it wasn’t—it was likely more subconscious and unintentional than intentional decision.

Rachel: 100%. Yes. It was an anxiety-ruled decision.

Bo: Got it.

Brian: Y’all keep using these SAT words and I’m going to—I mean, we’re going to have to go have a discussion here in a minute. Good at math. If you saw my SATs, not so good with some of the other SAT words.

Understanding the Iowa Pension System (IPERS) (16:05)

Bo: So, now let’s talk about your savings. The way that you build—you said you’re a public defender. So, the way that your retirement is structured and set up is a little bit different. Can you tell us a little bit about that? It’s not like you just have a 401(k) like some people might be familiar with.

Rachel: Sure. So, we have a system called IPERS, the Iowa Pension System. I’m sure it has other words in it that I don’t recall right now, but basically, a part of my paycheck comes out every month. I think it’s approximately $300, maybe $290. And then the state pays maybe like $430 or something each month. And then that’s just set aside. So when I retire, there will be a pension amount that I will receive monthly until I die.

Bo: Is it based off of the money that you put into the system or is there a different formula that determines what your pension amount is?

Rachel: It depends on when you retire. So the amount is markedly different. I could retire at 55 under our system, but I think I would get like $3,000 a month or something.

Bo: So, one of the things that we try to determine is, okay, your pension is based on your highest five earning years, and then there’s a multiplier based on how long you’ve worked there, what your age is, how many years you’ve put in. And so, we said, okay, well, let’s kind of estimate what this looks like. And you said, right now your income is about $120,000 a year. And we said, “Okay, what if we just assume 3.5% wage growth, just fairly conservative inflation-adjusted wage increases?” By the time that you get to 65, we’re going to use 65 as our base level assumption here. Your projected monthly benefit at age 65, if we assume that 3.25%—I’m sorry, I said 3.5%, we use 3.25%—annual wage growth, about $10,254. That sounds pretty good, right? It’s a future value though. So when we think about that $10,254 at that point will not feel the way that $10,000 feels today.

Rachel: Sure. Of course.

Bo: So that would be the equivalent at age 65 of about $5,700 today. What’s your burn rate? Do you know what you spend on a monthly basis to do the things you want to do the way you want to do them?

Rachel: I try to spend no more than $5,000 total. So I would be totally fine there.

Bo: So if we have $5,700 coming in, that’s great. One of the issues though with the IPERS system is that there are no cost of living adjustments on that. So once your pension starts, it’s kind of locked in at that number, right? So we don’t just want to think about year 65, we want to think about age 70, 75, and so on. And so we just want to kind of model for you as you go through time, the purchasing value of your pension goes down. As you can see, it starts at $5,700 a month in today’s terms, but as we go through time, the purchasing power of those dollars becomes lower and lower and lower. Well, likely your lifestyle will either stay the same or when you retire, hopefully it would actually increase a touch. So, we have these two things moving in different directions.

Rachel: Sure.

Why Save Beyond the Pension? (19:05)

Bo: A lot of times we have people ask us this question. “Hey, if I have this big pension and I’m able to get the average of five, why would I save anything else? Why would I continue to build?” This is why, right? So, I think we agree your pension is going to solve a huge chunk of your need in financial independence, but it’s probably not going to solve all the need. Is that a fair statement?

Brian: Well, and also there’s an underlying risk that’s sitting out there. If we went through—and I don’t know that we will because typically high inflationary strikes—I’ve lived through two now, the late ’70s, early ’80s and then during the pandemic period that we had this huge run-up of inflation—you’re running some risk. As long as inflation went back to normal or below average, your pension’s actually going to be great. But we do run a risk that if we have any extended periods of higher inflation, it does minimize the value of this future promise because that’s what you’re trading in—some of your earning potential so that you can get this promise from the government. And the promise depending upon what the purchasing power of dollars is many decades in the future, it is a big question mark. So that’s one of those things as a financial planner—we’re always like, well, we have to try to figure out what’s the counterbalance because this is a blessing, but how do we add something so that we don’t have to put all of our eggs in one basket? And that’s where we’re going to talk to you about trying to once again use the Financial Order of Operations. How do we build something in the background to kind of be a flex system on what’s going on with the pension plan?

Building Assets Beyond the Pension (20:44)

Bo: And it doesn’t seem like this is news to you because if you look at your savings priority, you are currently contributing to some of the defined contribution accounts. You are putting money into your 457. There’s money going into your 401(a). So you can see that all in—if we just kind of remove the pension from the equation—you are saving and investing or have a total amount being invested on your behalf of about $3,000 a month. So, if we just take the amounts that you have in your retirement accounts now, plus that level of savings, when you look at the portfolio path, we go from $232,000 today, and this is assuming a very conservative 6% rate of return. When you get to 65, just that level of contribution is going to get you to $884,000. Now, again, $884,000 in the future won’t be worth the same today. If we bring it back in today’s dollars, that would create annual retirement income for you of about $20,000 a year.

Rachel: Oh, wow.

Bo: Right. So, we just take $20,000 divide by 12, it’s about $1,600 or so a month. But now in retirement, we’re starting to stack. So, we have our pension coming in and then we have some portfolio resources we can use. All right. Well, now at age 65, if we think about today’s dollars, just based on what you’re currently doing, you’re on track to have $7,300 a month. And the beautiful thing is your portfolio assets, those do keep up with inflation. So, it will retain purchasing power, but we still have a little shortfall as we get into the later years. We get into the 80s and 90s, we’re falling below that critical $5,000, assuming that’s about what you spend.

Rachel: Sure.

Bo: So, we do still have a little bit of a shortfall we have to make up for.

Don’t Forget Social Security (22:24)

Bo: But in true Billy Mays fashion—but wait, there’s more. There’s more. Because one of the things that a lot of people—and it’s I don’t want to say controversial, but some people are more certain of it and some people are less certain of it. But as of right now, Social Security is part of what’s available to a number of Americans when they retire. And so I said, “Okay, well, if we think about how much Social Security you’ve paid in plus what we estimate if you continue to work, your Social Security would generate at age 65 about $2,800 a month for you.” Now, we like to be very conservative with Social Security because of some of the unknowns. So, we said, “Hey, what if we assume that it only grows at about 1.5% per year? It is going to lose some purchasing power in retirement, but still likely going to be there.” Well, what you can see is that at age 65, you actually have $10,000 living income coming in.

Rachel: Yeah. Okay. That’s really good.

Bo: That does decrease through time.

Rachel: Sure.

Bo: It does seem to create that opportunity. At that stage of life, you’ll likely be able—if your living expenses are $5,000—that leaves a lot of room for using those resources and those dollars for other things.

Rachel: Yeah.

Bo: Right. For philanthropy and giving and that sort of thing. So it seems that with what you’re doing right now, you are on a pretty healthy track, assuming an age 65 retirement.

Rachel: Sure.

Brian: How does that make you feel?

Rachel: I don’t think a lot about retirement. I feel like I’ve felt some comfort just because of the situation I’m in, but it is nice to see how it stacks up. This would be a time when my kids would be in college presumably. I could maybe be more assistive there and then be a lot more assistive in my community.

The Cost of Early Retirement (23:58)

Bo: One of the things I think it’s important to note though is all of this is predicated upon age 65, right? So, one of the things that we would encourage you to think about as you move forward—because you said “I don’t think a lot about retirement”—whether you think about it or not, barring something else happening, it’s likely going to happen. You’re going to make it to age 65 probabilistically, right? If you were to begin making decisions around “hey, I think I want to exit the workforce at 60,” well, now all of a sudden, my highest five years of earnings are likely lower. The multiple I get on my pension is likely lower. I’ve had less time to save up and build assets, so that’s lower. And I’ve also paid less into the Social Security system, so I’m likely to have a lower Social Security. So, every year that we move earlier has a cost associated with it. The longer we wait to begin thinking about that, the more difficult it is to overcome that cost.

Rachel: I think this year my anxiety has been related to I just didn’t know what life was going to look like, you know? I really had to reconfigure that. And your book has been very helpful just to tell you. I read it after I got a divorce.

Brian: Were you the money person in y’all’s relationship or was it your spouse?

Rachel: He really was, honestly. I’m sort of embarrassed to say that.

Brian: No, but I think that’s good for the public to hear because you hear people—and so you had to not only lose this important part of your life, but you had to now go back and essentially gain a new skill set. Gain a new skill set to take on that. And you’ve done this all in a year. This is not like you eased into this. This is like welcome to the deep end.

Finding the Right Financial Advice (25:30)

Rachel: Well, I have to give credit. My friend Susie is the one who recommended your book. I was reading Dave Ramsey.

Bo: Okay.

Rachel: And I called her like, “Look, apparently I’m supposed to have three jobs and never spend another dollar again.” And she’s like, “No, no, no, no, no, no. You need to be reading this book.” And so that was very helpful in kind of structuring how I was going to do things differently. And there’s a lot in there that resonated with me. I love that you put generosity first. I think that’s great. There was a lot in there that made sense to me. So, I appreciate that. I think I was just trying to figure out this year what it looks like. I just really did not know and now I feel like I know. So, now I would like to think about it differently in terms of how to prioritize.

Brian: Anything that you wish that you could tell somebody if they were going through this?

Rachel: I don’t know if this is answering your question, but that it is worth it if you think that’s the best path for you. Like you can figure it out, you know? I don’t think I fell into any traps. I think I got anxiety about just not knowing. I just didn’t like that. I think I got very rigid for a while and probably stressed my kids out with, you know, we’re not buying anything right now. But we did get to the other side of that. We figured out what we could do. And I think we’re doing okay.

Brian: Any credit card debt or anything? Did you stay away from it the whole way?

Rachel: I stayed away.

Bo: That’s awesome.

Rachel: Oh, thank you for saying that. Yes. No, I was scared to. I didn’t want to use credit cards at all.

Brian: And where’s that come from? Because you’ve always just been the type to avoid credit cards?

Bo: Well, you heard her say she was reading Dave before us.

Rachel: Right. Exactly. I mean, I was just worried that I would overspend. I literally charge on it and then pay from my bank account. So, it’s really just to get points honestly. But, so no, that has not been an issue fortunately.

Bo: That’s great.

Small Changes, Big Impact: Maxing Out a Roth IRA (27:12)

Bo: Well, one of the things we want to show you is that because as you sit here today, small changes, small adjustments can have pretty significant impacts. So we said, “All right, if you recognize, okay, what if I did want to give myself some flexibility earlier on and I want to be true to and honor the Financial Order of Operations and I wanted to save more, where would I go?” Well, once you get the emergency fund knocked out and you come through step four, well, then you end up in step five. That’s Roth IRAs and HSAs and building up your tax-free. We said, “Okay, what would it look like for Rachel if all she did was just max out a Roth IRA?” She just said, “Hey, I’m going to start doing that $7,000 a year.” Even just deciding to do that now at age 45 rather than your investable assets only growing to be $884,000, just saving that additional $7,000 a year in the Roth now takes your portfolio by 65 to $1.1 million. That’s not really the point I want to draw your attention to. What I want to draw your attention to is that at age 65 on the path that you’re on, you’d be able to generate from your portfolio about $20,000 of income a year. By saving in a Roth, you see that you actually are able to generate about $20,000 a year of income from the portfolio 5 years earlier.

Rachel: Yeah, that’s great.

Bo: So, if your goal is to buy back time and to create flexibility, the earlier you can begin making those decisions, the more impact those decisions can have over the long term. Okay? Because when we think about your dollars right now, what I want you to take away from today is—all right, there’s probably an optimal way to use my dollars and there’s probably a less optimal way. And defining optimal is going to be up to you based on your goals.

Rethinking the Mortgage Prepayment Strategy (28:47)

Bo: We already discussed your sister—I could pay her $700, but instead I paid her $1,000, right? Well, there’s $300 that could go towards a Roth IRA or there’s $300 that could go towards philanthropic endeavors if that was your desire. So, I want to talk about another area where we think perhaps we could free up a little bit of capital. And you already know where we’re going with this. You said you’re prepaying your mortgage.

Rachel: Yes.

Bo: Right. And you said, “I just have this desire to be out of debt and not have that.” Right. But when I asked you what your goals were, you said, “I want to give.” And then you said, “That was it.” And then I kind of pulled out of you, “I also want to be financially independent.” And then there’s probably this tertiary goal of wanting to be debt-free. If you were thinking about priority, is it more important for you today to be debt-free or financially independent?

Rachel: I mean, I think financially independent.

Brian: Financially independent. Great. All right. Are you leaning that you would do the Roth once you get your emergency fund fully funded? Do you think you’ll do the Roth?

Rachel: Well, Megan Green asked me if I would follow your advice if you gave it to me and I told her yes. So, I feel like I should say yes. I mean, I’m hearing you say it and I’m thinking maybe instead I could do more philanthropic stuff, but I’m open to thinking about it.

Brian: Because you’ve been nibbling around the edges. You can still do both. I am the “all the above.” It’s just—but I do want to challenge you as a parent also. Do you think your children will have this boom-shakalaka opportunity you have with IPERS? I mean because seriously you put in six, the government puts in nine, you get 15 for six. Even in my lifetime we’ve seen a huge transition away from that. It seems like more and more of the world is pushing it more and more on your shoulders.

Rachel: Totally.

Bo: But one of the places if we were going to think about “hey, where should your money go?” I’m not hearing you say paying off my house is my top priority, above philanthropy, above financial independence, and yet here you are. You’re paying extra on your mortgage every single month. And remind me again what that mortgage rate was.

Rachel: Yeah. 2.375%.

Bo: If we were in a live chat right now and asked for a poll, how many people would absolutely lose their mind if they had 2.375%? How many young people would be throwing tomatoes at you right now?

The Math on Mortgage Prepayment (31:02)

Bo: So we said, okay, well, let’s show her the real math. Let’s say that even if your goal were to be debt-free, I don’t even think you were attacking being debt-free in the most efficient manner. I think you could do it differently. So if we think about your current mortgage amortization, if you were just making the minimum payments on your mortgage you’d have it paid off by October 2047. And you said “That’s not good enough. I don’t want this mortgage for that long. I want to pay it off early.” So you said “I’m going to pay what, an extra $200 every month on your mortgage?”

Rachel: Yeah, basically.

Bo: Basically $200 bucks a month. Well, with doing that extra $220—it’s even more than I said—you are on track to pay it off by 2042. So, five years earlier, that’s going to save you $13,000 in interest, which is awesome, right?

Brian: That doesn’t sound like a lot for that many years.

Bo: Years. I’m doing a thing here. Go ahead. Really? That’s where you’re going?

Brian: I’ll stay quiet.

Bo: So you can pay it off 5 years earlier. That is a thing that you could be doing.

Brian: Divide 13 by five.

Bo: Okay, Brian, we get it. So we said, “Hey, what if instead of paying that $220 on the mortgage, what if you set out with the desire to be debt-free, but used a different vehicle than actually putting it on the mortgage?” Because do you know how much interest every dollar you pay on your mortgage saves you? 2.375 cents. Right? Like that’s the way that that math works, right? If instead we took that $220 and we started investing it and we said, “let’s just put this to work and let’s say we can earn 8%”—you’re young, relatively moderately aggressive risk tolerance, 8% rate of return—do you realize that the intersection of your current mortgage and the dollars that you would be building in that little side account actually happens two years earlier than the path you were on right now?

Rachel: I did not realize that.

Bo: So even if your desire was to be debt-free, I would argue this is probably the optimal way to get there because you’re going to get there two years faster.

Brian: Well, it’s not even telling you how much that amount—I mean, you can look at it because I can cross reference even though I’m getting older. Is that $80,000?

Bo: That’s about $75,000.

Brian: Yeah, that’s a decent amount of money just sitting in an investment account.

Bo: And so, you’re also going to be at this position in the year 2040 where you’re going to have a $75,000 mortgage at 2.375% and you’re going to have $75,000 sitting in an investment account. And you’re going to have some decisions to make. And you may decide, “okay, this is great. I want to be able to help my kids. I want to be able to do philanthropy. I want to be able to pay off the mortgage.” Or there is a scenario where you say, “hey, I just want to let this money keep growing all the way out to retirement.” By the time that you paid off your mortgage on its original schedule, by 2047, just that little $220 a month extra that you’re paying in principal could turn into almost $160,000.

Rachel: Yeah, that’s a big difference.

Even Paying Off the Mortgage First is Suboptimal (34:12)

Bo: And we thought, “okay, she’s not going to believe us, right? We have to double down on this even more.” I said, “Okay, well, what if you kept on your current trajectory, paying off that mortgage, and said, ‘Guys, I’m so disciplined. As soon as I pay off my mortgage, I’m going to start investing the whole amount.'” Well, even if you did that, by the time you got to the same 2047 year, you would have almost $90,000. You’re talking about $70,000 less value from implementing what I’m going to call a suboptimal strategy. So, if there were other goals that you had like financial independence or even philanthropy, I would argue that those goals could likely be better satisfied by rethinking how you’re deploying your dollars.

Rachel: That’s super helpful. It’s nice to see those numbers that way. That makes sense.

Bo: Because see, I don’t think she’s—I don’t think we’re not going to convince her to do the Roth. I mean, we might, but if we tell her, “Hey, we just freed up $300 from your sister and $200 from the mortgage,” that’s an extra $500 a month. There’s a lot of meaningful change and meaningful impact you can have with a number of organizations at $500 a month. That’s a big deal. Or $250 a month towards that goal and $250 a month towards financial independence goal. It doesn’t have to be all or nothing.

Brian: That’s where my heart was. I was like, why can’t we do both? I mean, do $250 to each. That way you get to model some good behavior for your kids, but then you get to also model being generous, right? That’s the win for me is to do both.

Homework (35:48)

Bo: All right. You ready for your homework?

Rachel: Yes.

Bo: Homework item number one, have a conversation with your sister. “Hey sis, I just want to understand, we had this original agreement. I adjusted it. Give me some feedback. Where are you? How does this work?” And she might say, “you know, getting 3% on my cash is pretty good. I could just kind of think of that as my emergency fund is paying me 3%, my high yield pays me 3.8%, not that far off.” She may be okay with that interest rate. It may be something that she’s comfortable with. Number two, I’d really think about my mortgage strategy. I’d really think about, do I really want to be paying that $220 extra a month or do I want to do something else with it? Whether that be open up a taxable account and invest it, whether it be give it to causes that I believe in. I would revisit that. And then number three, I would decide if where your dollars are going actually align with what your goals are. If my goal is X, am I deploying my dollars in such a way that it satisfies X or do I have the goal, but where my dollars are going is in conflict or in opposition to that? And I would try to realign those. And so it’s an easy exercise. I sit down and I list out all my goals. And then I look at my budget for the last month, two months, three months, six months, and I say, “Where did my dollars go?” Right? And did the dollars that I spent over here align with the things that I have on this side? If there’s misalignment, I would consider how do I realign this?

Rachel: Okay. I think that’s great. I’m going to do it.

Bo: I love it. She says she’s going to do it.

Brian: You’ve been wonderful. Thank you so much for coming to hang out with us.

Rachel: Fun. I really appreciate it.

Brian: By the way, Rachel, you had let us know one of the charities you were super excited about was your local library there. That’s where she got Millionaire Mission from. We are sending you home with some extra copies so you can give them even more copies to put into the library.

Rachel: Perfect. They will love that. Thank you.

Bo: Are we going to sign those? You think we’ll sign those copies?

Brian: Do libraries like signed copies?

Bo: If your goal is to get people to keep them so then you can rack up library fines, maybe it’s an alternative revenue source.

Brian: Thank you, Rachel, for coming on.

Closing (37:48)

Brian: Bo, if somebody else wanted to come on Making a Millionaire, where do they need to go?

Bo: Yeah. If you want 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 calculators or resources, go to moneyguy.com/resources.

Brian: Guys, as you could tell from hearing Rachel’s story, sometimes life just happens. And it takes you back not from step eight where she started, but all the way back to step one. Small incremental decisions can still have huge results. We love sharing this type of content. It’s our heart as educators. You too can make big changes in your life. I’m your host Brian, Mr. Bo, and for Rachel, Money Guy team out.