The Uncomfortable Truth About the SpaceX IPO

The SpaceX IPO: Everything You Need to Know (0:06)

Brian: Space. Woohoo! Everything you need to know.

Bo: Brian I am so excited about this because it seems like the entire world is talking about this right now. It has, as some would say, entered into the zeitgeist.

Brian: It’s fun being a human. And I think about this because it’s entertaining in some ways. You hear that SpaceX is going IPO, and look, this has been out there for so long because promises have been made to all the SpaceX employees: “Hey, we don’t overpay, but you’re going to be fine. It’s going to go well because we’re going to get this thing public.” Years have gone by, and then I start thinking about, you can’t make this stuff up, NASA announces that they’re going to partner with Bezos and Blue Origin to go to the moon, and then fast forward like two or three weeks, Blue Origin doesn’t work, the rocket blows up on the launch pad, and you’re like, oh my gosh, SpaceX is still going public. And then I’m having a call last Friday with my mom. My mom is like 79 years old. And about halfway through the call she goes, “So I’d be buying some of this SpaceX?” And I’m like, what in the world? And then I start looking at the numbers and you see that the price to sales offering of what they’re anticipating SpaceX to be and you’re like, whoa, this thing is close to 100. That’s insane. And then magically, Google comes out and says, starting in October we’re going to pay SpaceX close to $1 billion a month just so we can have access to some of their data centers and processing power. And then Fidelity sends me a notification saying, “Our minimum of $500,000 account value to get access to IPOs, we’re waiving that. It’s going to be $2,000. We’re just going to open this up for everybody.” And then all of a sudden all the exchanges are trying to make it where they can have SpaceX included pretty quickly without any seasoning requirements or anything. I’m like, okay, man, somebody needs to go through this and tell me what I’m supposed to think. And that’s exactly what we want to do for you today. We’re going to go through what is it, what’s happening, how could the SpaceX IPO be a good thing, how could it be a bad thing, what are the things you ought to know about it, and ultimately what should you do as an investor trying to build your army of dollar bills?

Bo: So Brian, let’s start at the very beginning for folks who are not super familiar. What’s going to happen later this week as of Friday is that SpaceX is going to go through what’s called an initial public offering. What is an initial public offering? This is when a private company says, “You know what, we need additional money so that we can invest and do other things, and the way we want to do this is bring it so the public can now have ownership in this company.” The people who currently had ownership in the company were the early investors, founders, and early employees. So one thing that an initial public offering can do is provide a liquidity opportunity for those early employees, for venture capital firms, for other types of private owners. And it provides a mechanism by which everyday investors who are not involved with the actual day-to-day operations of the company can now get exposure to the company. And what’s really interesting is SpaceX is getting all of this hype and attention right now, but this is not the first super hyped-up initial public offering we’ve seen. It’s not even the first one we’ve seen in the last decade or so. A good one that comes to mind is Facebook.

Brian: Yep. Go Facebook. And it was hard when I was talking to Justin as we were putting together these show notes, I was like, let’s show a chart of what Facebook’s first day of trading looked like, because the first day that SpaceX goes hot, it’s going to be crazy. There’s going to be a lot of trading. What happened with Facebook is that it actually went all the way up to $45 that day. The IPO price was $38, so there was an 18% surge on day one. So it popped really, really quickly.

Bo: And so the idea is, ooh, I really want to be involved with an IPO because so many people want a piece of this, as soon as it hits the market the price is going to shoot up. And a lot of times with initial public offerings, that is indeed what we see. But that’s only part of the story, because if investors end up arriving at the conclusion that valuations are too high, or perhaps the enthusiasm around a company begins to wane, then the actual price of the stock can fall. And that’s exactly what happened with Facebook’s IPO. Just a few months later it dropped 54% from its initial public offering price.

Brian: And for those of you who are like, okay, man, that stinks, but I think this is going to be different for SpaceX, it’s important to look at what the data says for the majority of IPOs. A study of the 30 major IPOs found that the average maximum first-year drawdown hit 55%, right in line with what happened with Facebook. Now, look, we’re not saying that’s necessarily what’s going to happen with SpaceX, but nobody really knows what SpaceX is worth. That’s what this initial offering is for. But it is important to note, and we’ll talk about this later, you have many more opportunities to buy SpaceX because every day after this it’s going to trade on the exchange. This is just the day that all lights will shine on that offering.

What Makes This IPO Unique (7:11)

Bo: So the question then becomes, what’s the big deal? What’s unique about SpaceX relative to other companies that have gone public? We think it’s a few things. Number one, with this initial public offering and the valuation they are putting on SpaceX, Elon Musk is well on his way to become the first trillionaire, the first person to have a net worth of $1 trillion. So that’s culturally significant. That’s a unique thing that’s never happened before. And the company intrigue is definitely hot on this. You’ve got Starlink, rockets, X which is Twitter, SpaceX. They’re anticipating it to come out at around $1.75 trillion, or could come out somewhere close to $2 trillion. That’s instantly a top ten publicly traded company. This is not just a company event. It’s a market event. And it’s likely that in 2026, this is going to be the first of a number of mega IPOs.

Brian: And it’s also important to notice that even though we just heard $1.75 trillion, Elon is only selling less than 5%, around 4%. So this is going to be a very oversubscribed event because a lot of people are going to be very interested in this but there’s only a small portion of shares actually available. That creates a scarcity moment that’s going to create some crazy distortions.

Bo: Well, and the other thing that’s really unique and why this is perhaps a significantly larger deal than other IPOs in the past is there are some rules that are changing and some protections that have been in place that could be changing. We want to address that. But before we do, let’s talk about why this could be a good thing. Why would participating in the SpaceX IPO and being a shareholder likely be a positive thing? The answer is that a lot of really flashy, highly publicized IPOs have led to generating a lot of wealth. If you just take two companies that have been in the media recently, Nvidia one year after its initial public offering was up 127%. Palantir one year after its initial public offering was up 153%. If you look five years out, Nvidia was up 380% over the first five years of trading, and Palantir was up over 1,800% since its first five years of trading. So if you are an early investor in this initial public offering, there has been a precedent where those companies can do incredibly well over the next 12, 24, 36, or 60 months.

Brian: I get the hype. Don’t you understand why everybody’s kind of excited? Because Elon has done some crazy things, creating companies that really do change the way we live. I know he’s controversial, but you put that up on a shelf and just start thinking about the fact that because of what we’ve done with all the satellite technology and Starlink, I mean, now when you go on a cruise, you’re not off the grid anymore. And even when you fly on any airline, you can doom scroll for the entire hour-and-a-half flight because we’re able to stream. I even remember when I went on a catamaran trip, out in parts of the ocean where there’s no artificial light, and you look up, you can literally see the satellites flying over, and you’re like, this is a new world we live in. But I’m worried that the excitement of all this new innovation is having people disconnect from the reality of what you’re actually expecting from this company. While there can be massive upside and a lot of opportunity, there’s already a lot of risk. There’s already a precedent that in the first few months or years after a company goes IPO, there could be a large drawdown, on average 50 to 55% in the first couple of months.

The Headlines About Your 401k: What’s Actually True (12:38)

Bo: And there’s also another thing going on that you’ve likely been reading. There have been a lot of headlines out there that say something like, “Elon is about to steal from your 401k,” or “Index investors: experts sound alarm over Elon Musk’s coup that’s about to rob your 401k,” or “Wall Street is already bending its rules to suck more people into SpaceX’s IPO,” or “SpaceX IPO: no matter what, Michael Burry flags retirement savings are exit liquidity for insiders.” So even if you’re not all hyped up about SpaceX, you may be asking, well, am I as a casual bystander going to be negatively impacted by what’s taking place with this IPO?

Brian: Look, because Elon is a somewhat controversial figure, I feel like sometimes in the media they’re doing some rage bait clickbait farming with some of this. Without a doubt Elon has got the cards stacked in his favor in this thing. He’s selling such a small portion of the company, it’s going to reward the employees. But because it’s so scarce at around 4%, there’s going to be a lot of demand. But fortunately there are safeguards. And it’s not just Elon that was trying to get this thing into the exchanges. You’ve got to think about Anthropic, OpenAI, all these companies that the indices want to include because the world is so gaga over AI right now. I am curious, what specifically are these exchanges asking and what protections are they taking away?

Bo: We have a slide to go through this. Oftentimes what will happen when a company is released through an IPO, there will be some seasoning period that has to take place before it can even be considered for inclusion in an index. But a lot of the indices have been changing or altering those seasoning periods. Why is that a problem? Because after an IPO comes out, like we saw with Facebook, there’s this wild undulation. Stock goes up. Stock goes down. It could drop 55%. It takes an amount of time for true price discovery to figure out what the actual price and value of this stock and this company is. And so generally the indices don’t want to include stocks until that price discovery has settled out. Some of them, I think probably to stay relevant, have been adjusting those seasoning periods. The Nasdaq, instead of having to be seasoned over three months, is now going to drop it to only 15 days. The FTSE Russell indexes had a 12-month seasoning period and they’re dropping that to five days. Rather than a full year, five trading days before considering inclusion. And the one that’s been on a lot of people’s radar is the S&P, which generally had a 12-month seasoning period with some other things that also had to be taken into consideration before a company could be included in the index. What was proposed was that they were going to drop that to only six months.

Brian: But I am so happy to report that Standard and Poor’s has come out and said no, they’re not going to change their seasoning requirements. I think this is good because when you really think about what’s going on with your 401k, your typical portfolio, the S&P is what people are really using as that market indicator. When we say don’t try to beat the market, be the market, a lot of times we’re leaning into the S&P because there’s so much historical data on it. I’m happy to report that they’re still going to keep some of those protections in place. There was also previously a minimum float requirement, meaning how much of the company is traded out on the open market before it could be included in the index. They have waived that, so even though SpaceX is not going to have a large chunk publicly traded, less than 5%, it’s likely going to be able to be included.

Bo: In reality, SpaceX is only initially expected to make up around a half a percent of the Nasdaq 100. So even though it has this large valuation and is likely going to be included in the index more quickly than it previously would have been, it’s not like it’s going to drive the entire index. It’s going to represent a relatively small portion. So even for you as an index investor, you are likely not going to get hammered by inclusion and the wild volatility that could potentially take place.

What Should You Actually Do? (18:48)

Brian: So let’s pivot. We’ve laid out the groundwork. Let’s talk about what you should do if you’re considering SpaceX exposure, because you’d have to live under a rock not to have this in your face right now. One thing is you should understand the valuation. When this comes IPO, what are they actually saying about how valuable this company is? The number we keep hearing is around $1.75 trillion. What does that actually mean? What you keep seeing all over the news media is that this price is anticipated to be around $135 per share. The price-to-sales ratio is what I’m seeing all over my social media feed. People are saying it’s a 90-to-1 ratio. And when you see 90-to-1, what that means is that assuming we don’t have crazy rapid growth, which by the way, if you’re investing in this, you’re counting on that, but just assume it didn’t, you’d have to have close to 100 years of good things just to recoup not the profit but just the sales that have been booked on paper. That’s a scary thing because a lot of good stuff has to happen without any hiccups for you to truly justify that valuation. And companies whose price-to-sales ratios were above 40 when coming to market tended to lag the market on average by 58.5% over the following three years. This wild valuation at IPO actually underperforms the market over the next 36 months. For context, the price-to-sales ratio of the S&P 500 in general is 3.7. The Nasdaq is 6.1. So when SpaceX comes out at 90-to-1, it does seem like a very frothy, very aggressive valuation.

Bo: Let me say something because I feel like if you were outside watching this, you’d be like, man, these guys are against SpaceX. Two things can be true at the same time. You can be really excited about what SpaceX is creating for the future, but also look at this IPO and go, man, there’s a lot of frothiness to this valuation, there’s an extreme premium, there’s a lot of scarcity to actual shares, and this is going to create some distortions in pricing that I’m not so sure I want to be on that ride initially.

Brian: Look, I’m pretty transparent with you guys. Elon is a unique personality because a lot of times when people build a company that turns into $100 million, they go, “Hey, I’ve won the dream,” and they go live their best life. But there’s a unique breed of people where the money just doesn’t matter. It’s something else that’s driving them. And obviously Elon is this person. He sleeps in these factories. He’s not buying the yachts. He’s not doing the other stuff. He’s got a history of creating incredible things. I think he’s playing only for the scoreboard and the changes he’s creating in the world. And that’s a pretty exciting personality. But you can be excited about SpaceX and still say, “I’m going to wait to see what happens with this price.” And that’s where my transparency is: I’m probably going to own some SpaceX, but it won’t be at the IPO.

Bo: That’s right. Because this is not your only chance to buy it. This is just the first public offering of these shares. What’s going to happen next week? Every day SpaceX is going to trade. And I think a lot of people are going to feel really good about themselves initially because of the scarcity and the oversubscription. This thing could pop. We could see it go from $1.75 trillion to maybe as crazy as $3 trillion in valuation. But is it really worth $3 trillion to you? Probably not. And remember, whoever’s offering you this IPO, they don’t want you to sell. There are even penalties where you won’t be able to invest in other offerings in the future if you flip this thing quickly. And then once the insiders can sell their shares, they’ve been waiting for ten years to get out. They’re going to go sell and that’s going to create crazy price distortions as well. So this will not be an easy ride, even if you feel like a million bucks after day one or day two.

Brian: You need to recognize that as exciting as this is, as much hype as there is, there are a lot of risks involved. Maybe you’re someone who says, hey, I’m not going to get allocated shares, or maybe as soon as trading opens on day one I’m going to go buy those shares. I would think long and hard about how this fits into your overall investment strategy and how aggressive you’re being with your allocation. Is this a small speculative thing that represents less than 5% of my total holdings, or am I just gambling on the hype? Really great companies can trade at really, really poor prices. You have to make the assessment of when it makes sense for you to participate, if at all, and whether it makes sense in your overall financial situation. Fidelity dropped their minimum from $500,000 down to $2,000. Close to 30% of this offering is going out to retail investors. That’s going to create some crazy distortions in and of itself. And on individual stocks in general, we often say you don’t want it to be more than 5% of your total net worth. It’s just too much risk to tie so much into one company. So if your total investable assets are less than $100,000, even following my rule all the way up, you’re going to buy $5,000 of this, and I don’t know, it starts getting to what are we doing? And it leads to my final point. This should be vacation money. Money you’re not eating with.

Follow the FOO (26:44)

Bo: That’s right. And I think a lot of people are getting so caught up in just the momentum of the discussion that they’re losing touch with reality when it comes to personal finance and building wealth. To the largest extent that you can, don’t make emotional decisions. Don’t let yourself fall into the emotion. Warren Buffett has made it so popular that fear and greed exist when it comes to investing, but we always want to be careful that we are never too fearful nor too greedy. One of the best ways that we think you can remove emotion from your financial decision making is to follow the Financial Order of Operations. We have a nine-step process to help you figure out what you should do with your next dollar. And I would argue that if you’re not well into step five, into step six, into step seven, maybe initial public offering shares and participating in speculative stocks is not where you should be in your financial journey. If you want to go check out your free copy, go to moneyguy.com/resources. You can download your free copy of the Financial Order of Operations today.

Brian: 27 minutes. I was hoping we did this in less than 20. I am so sorry to all of our Q&A fans. We’ll get to some questions, but man oh man did this just go all over the place. I haven’t talked to a single person in the last week who didn’t ask me about SpaceX. So I felt like we should cover this. And I love that we get to sit in this spot and do it. I love that we can speak to things that are culturally significant, that are economically significant, and really that are significant in your financial life. It’s why every single Tuesday at 10 a.m. we sit in these chairs to answer your questions, because we believe there’s a better way to do money and we want to load you up.

Moneyverse AMA Announcement (28:38)

Rebie: Wonderful. We’ve got some questions queued up. Keep them coming. Feel free to drop them in the chat. But first I do have an announcement, or really an invitation. Have you ever wondered what actually goes on behind the scenes of making the Money Guy Show?

Brian: I should be careful what you ask. Imagine if they could have seen behind the scenes this morning. I’m assuming you can tell because you just watched the first half of the show.

Rebie: The energy was good and exciting and spicy today. I like it. But yeah, if you want to know all about those details, if you have questions, if you’ve wondered things about the team, about what Brian and Bo are really like, then I want to invite you to join us in the Moneyverse tomorrow at 3 p.m. Central, because I will be hosting an Ask Me Anything right here in the studio with the team. Just go to moneyguy.com/moneyverse to join for free and we’d love to see you there. We’re going to have a channel set up to chat about questions about the content of the show, about behind the scenes, and just get to know you in the Moneyverse.

Bo: So you’re going to allow them to ask you anything about the show, about the behind the scenes, about us.

Rebie: And she knows way too much. It’ll be fun, though. That’s tomorrow at 3 p.m. Central time. All right, with that, let’s dive into some questions.

Q&A: Evaluating Salary vs. Equity at a Private Company (30:09)

Rebie: The first one is from Jake 2003. It says, “How should you evaluate salary versus equity with private company job offers? I have a job offer and you get to pick how much of the total comp you want in cash first.”

Bo: This is a really hard one because it’s actually a little bit easier if a big chunk of your income comes in terms of salary and wages from a publicly traded company. It’s really easy to understand, okay, if I’m going to get awarded this many RSUs or this many options or this many performance units, you can put a market value on that because they’re publicly traded. With private companies it’s a little bit different. How do I really know the valuation of a private company and how do I assess that? I think Jake, the first thing I would encourage you to do is ask for the most recent valuations of the company stock over the past couple of years. Some private stocks are valued quarterly, some twice a year, some only annually. What I would want to know is historically how has this private stock performed? Is this a stock where every year it’s got a five, seven, ten, or 12% increase in value? Or is this something that’s flatlined or gone down in value? That way you can understand, at least with some reasonable idea, what the trajectory of this company is going to be. That’s the first question I would ask. The second question is what does liquidity look like if I decide to take this job and I leave, or I want to cash out shares? Meaning are these actual shares that have real economic value to me either today or sometime in the next few years? Or are these shares that just show up as phantom equity in the event that there is some liquidity in the future? There’s not a right or wrong answer to either one of those, but you really want to understand and know what you’re getting into.

Brian: I wrote some questions too. The first question I’m going to ask you is, do you truly believe in this company? Do you think this company is really creating something that’s going to be very profitable and changing the world for years to come? Now look, you should know, just because you believe doesn’t mean it’s true. I’ve dealt with a lot of executives in Atlanta back with Lucent Technologies. You may not even know who that is anymore, but that’s how old I am. These things were supposedly changing the world and then the company still can go to zero. So even though you believe, it might still go to zero. And that leads to my second question: where are you in your journey? We have some clients where, and I’m thinking of one in particular, when he was in his 20s he got to make this exact decision with a very well-known public company. He pretty much loaded it up. He said, “Look, I’m young, I don’t require much to live. I’m going to throw as much as I can into the equity side of this.” And it created a multiple seven-figure opportunity for this individual in the long term. But did you hear the context? He was in his 20s. If this all went to nothing, it didn’t really matter. He could start over. Yes it would hurt and the opportunity cost would be there, but it wasn’t catastrophic because he still had his knowledge and his big shovel. He could go get another job. That’s different than somebody who gets this opportunity when you’ve got a spouse, children, and a big mortgage. You have to understand the risk versus reward and act accordingly. So if you’re at the beginning of your journey and you can throw it against the wall, you can probably break some of our rules and see if this sticks, if you truly believe. But if you’ve got a whole family depending on you, this is the whole risk that goes along with entrepreneurship. There’s also nothing wrong with doing the 3D glasses even in this type of scenario. Run the scenarios. Your dream plan: Holy cow, we’re going to be rich! The down-to-earth plan: maybe it doesn’t go as well as you think. And don’t skip the doomsday plan: Holy cow, this company I work for goes to zero. Not only do I lose my job, but I also lose all the money I invested in it. How is that going to play out?

Bo: I’ll give a little bit more context just because we happen to know Jake. So Jake is, you know, around middle age, and he said this is a four-year-old company, series A, so early on in its funding cycle, and these are stock options that are being awarded. What’s great about that is there is an option for you to participate in the upside but there’s not a big capital outflow. What’s probably going to happen is if you sign on with this company, they’re going to give you some sort of options that you’ll have the option at some point in the future to buy and participate. It is a little bit lower risk in terms of, well, it depends on how much they’re trading off the salary for the options. But you really want to measure what do I think this company’s going to do? It’s a four-year-old company. What do I think the prospects are? And based on the valuation right now, am I in a place where if I wanted to exercise these options and turn them into actual stock at some point in the future, do I have the financial means to do that? Is there something meaningful I could do and am I at the right place in the Financial Order of Operations that it makes sense for me and my family presently?

Brian: And 45 is not really middle aged. That’s actually pretty young at heart.

Q&A: Guidelines for Buying a Vacation Home (37:06)

Rebie: We’ve got another question queued up from Leah. It says, “What are the guidelines for buying a vacation home? I’m on step eight, 32 years old with a $220k income and $450k retirement savings. We have two young kids. A lake home is a dream of ours, but it feels like we’ll never be able to justify the splurge. When would it be okay?”

Bo: Can I just empathize for a second? Here’s what Leah is thinking. I’m 32. We have two young kids. If we’re going to buy the lake house, we should have a lake house while the kids are young and they can enjoy it. We can go do the boat, pull them on the tubes, do all of that. And I get that. I think a lot of people in the messy middle fall in that category of wanting to be able to create memories for their kids right now.

Brian: And I love hearing that you’re 32 years old, you have a great income, you have a great amount of savings built up. The question I would ask is, why the vacation home? Is the lake house a drive away, like an hour away, or are you buying a lake house that’s going to be two states away? How often will you be able to use it? Do you have the cash flow to be able to pay for the carrying costs of having it? Or if lake living is something you really want to do, have you priced out what it would be like if you just spent a lot of time at the lake during the summers? I would really want to investigate what’s the thing that’s driving me toward trying to own this second property. And I’m a huge proponent, I know we have a little bit of disagreement on this, but I don’t love second properties. I think a lot of times if you actually measure the math, it doesn’t make any sense. You can enjoy the experience that a second property offers without having to do ownership. You just factor it as an expense and cost.

Bo: I mean, look, Doctor Stanley in his book Stop Acting Rich, which came out after Millionaire Next Door, I love it because it really dispels a lot of the things that you think rich people do. The reality is that from a context standpoint, most rich people don’t have second homes. Despite what Robin Leach told me as a child. But I also want to be consistent with my no-hypocrisy policy. I own a vacation home. So I want to give you the context that led me to it and hopefully give you some clarity too. Vacation property is kind of a disaster in a lot of ways because stuff can go wrong pretty remotely. What saves me is that I actually have a person who goes and visits my property weekly to make sure things are fine since I don’t rent it out. Here’s the reality for Leah’s situation. You’re 32 years old. I’m going to count on your savings rate being beyond 25%. But if you do the vacation home, your savings rate still has to be well beyond 25%. You need to be in the frothy phase of life where you just have so much income and so many assets built up that you look at the memory-making opportunity and go, well, I can’t take it with me. And I don’t think most 32-year-olds are there. It took me being in my 50s before I was like, okay, I’ll give this to the family, because this is just not going to move the needle whatsoever in the long-term success. I mean, I’m now leasing a luxury car for my wife. I’m in the horrible decision phase of my life because it just doesn’t move the needle anymore.

Brian: It’s not about the math anymore. It’s about what creates the happiness and everything beyond the mathematical parts of it. For a 32-year-old, that’s going to be a pretty high bar to be beyond the math of the situation. So I’m not saying you can’t do it. I’m just saying you have to be so frothy in your savings rate and your success that you’re at the “I can’t take it with me” point. And that’s a pretty hard thing for somebody at that age. It gets easier as you get into your 40s and even 50s. But measure twice, cut once on such a big life decision.

Bo: It’s so specialized because we have a buddy of ours who bought a lake house a couple of years ago and he loves it, makes tons of sense for his family, they go all the time, and it’s only a few hours away. And we have other folks who’ve asked about buying a lake house where we’re like, hey, don’t do it, it doesn’t make sense, it’s not where you are. I’ve got two or three friends who were all hot and heavy on their lake houses for two years, and then something happens and they haven’t been to the lake house. Now they just go to do maintenance. And it can be good maybe as an investment, but I don’t even know if that’s the case with how much real estate has run up in the last five years. You have to be careful. If you decide it doesn’t work in five to seven years, and all the frothy gains were in the last five years, you might put a lot of money into this thing and not make a ton of money. If you’re in the phase of life where you can’t take it with you, it’s okay that you lost a little money on this life adventure. But if you needed this money to be successful, then you probably shouldn’t have bought it.

Brian: My family and I, I’ve got three young kids, we’ve kind of turned into a lake family. We love it. But here’s what we do. We get an Airbnb, a really nice lake house, and we travel with friends who have a boat. You do those two things and it’s the most cost-effective way to get to live the lake life. Step one: find a friend with a boat. There are a lot of financial mistakes you hope your friends make.

Q&A: When Do You No Longer Need Term Life Insurance? (43:30)

Rebie: Next question is from Really Bored Man. The question says, “Hey Brian and Bo. I know you guys are big fans of term life insurance. When do you know that you no longer need it? Is it when you hit coast FIRE and are still working, or another time?”

Bo: Let’s think through this. When you hit coast FIRE, you have built your assets to a level that they will grow to be able to provide for you later in life when you decide to fully retire. But what life insurance really protects you against is not the expenses you will have in retirement. It’s the expenses you incur today while you’re living, when you have other people depending on you to go out and generate an income and provide for housing, shelter, and food. That’s when there’s an insurable need on your life. So even if you’ve attained coast FIRE and you’ve covered years 60 through 90, you likely still need term life insurance to cover the years from now until then. Because those are the expenses you’re incurring today that you need your current present-day income to pay for. It’s not so much about net worth as it is about: if your income went away today, are there folks that would be put in a bad situation? If your spouse and kids would be put out because that income is gone, then you have an insurable need on your life. If you pass away and there’s enough assets to provide for the well-being of those people that depend on you, then you’re self-insured. Most folks don’t reach that level until significantly later.

Brian: Have you reached the age of self-insurance, meaning you have enough in assets today, not ten years from now or 20 years from now, but today, that if you left the earth prematurely, your heirs could cover all the debts and all their income and expenses would be covered? That’s where you are. Now here’s a weird dynamic with that. I am on paper at that level, but I still am paying some of my annual fees on my term insurance. Because it’s so dadgum cheap. I bought a 30-year policy when I was in my mid-30s. And so the premium for millions of dollars of coverage is just not that much money. There’s a kind of an arbitrage situation where I don’t need the money to insure my family, but the cost of the actual insurance, if you had to go get underwritten again, would be substantially higher than the premium I’m actually paying. So there’s a little bit of an arbitrage. I don’t want anybody to get excited if I pass away. But it is a financial decision. I can pay this thousand dollars here, and if I died prematurely, my family gets three or four million dollars. So from the arbitrage opportunity, I should wait until that term resets before I actually do away with the policy. Even though you might not need it, it’s so cost-effective it’s kind of crazy not to keep paying for it.

Rebie: Good thoughts. Thank you for the question, Really Bored Man. Hopefully you’re no longer bored.

Are Brian and Bo Buying SpaceX? (47:09)

Rebie: Next question.

Brian: Are you buying SpaceX?

Rebie: I don’t know if you know this, but I’m not much of a stock picker because I follow the FOO and the market. Solid answer.

Brian: I will own some SpaceX, but it will not be at the IPO. I love that. I’m also willing to say, because we’re humans as well, I still have a client that asked me to get them in on the Google IPO in 2004. Now they’re still clients, by the way, but they like to remind me of that.

Rebie: I put a survey in the Moneyverse asking “Are you planning to buy SpaceX?” and 70% have said no, they’re on the AB train, looking but waiting. So they’re with me. Love that.

Brian: And we did have a few say no, not yet, or I’m too early. But this is going to be an emotional roller coaster. You’re going to feel euphoria some days and then other days you’re like, oh my gosh, I can’t believe what’s going on. I hang out with you too much, Bo, because I’m like, why would I want to ride that emotional roller coaster when I don’t have to?

Bo: And I didn’t mention this in the show, but there’s also another behavioral thing. If you would have participated in Nvidia’s IPO and held onto the shares today, the return was something like 593,000%. You know what you’re probably not going to do? You’re probably not going to hold it all the way to 593,000%. Sometimes, and write this in pencil because it’s dumb but I’m going to say it, making a lot of money on a stock is a bad thing. Because you don’t know when to exit, or if you do sell and you get out, then you have all this remorse. Oh man, I can’t believe I sold my Nvidia when I was up 1,000%, I could have been up 593,000%. If you are someone who’s buying the index and it’s rebalancing, you don’t have to concern yourself with that as much. You just focus on building your net worth, building your portfolio, and removing a lot of that emotion from the equation.

Q&A: 529 Contributions for a Newborn (49:40)

Rebie: Let’s go to Kyle’s question. “Hey Money Guy Show. My wife and I just had our first child. We want to get ahead of the curve for college. In Wisconsin, the max tax deduction is $440 per month for a 529. Should I max this out? We are 30 and 28. We have $260k income and $180k saved.”

Brian: Wow. The income is incredible. But I am surprised that the amount saved doesn’t equal the income. That means you probably had a huge pay bump in the last year or two, because it hasn’t equalized yet. So I would put it back on you, Kyle. Are you saving and investing 25% of your gross income? If you are, then above and beyond that, yes, you can get into step eight and start funding the 529. It depends on how much excess cash flow you have from that 25% savings to see if you can max it out. But I’m not going to prioritize the 529 over your own retirement savings just because of a tax deduction. You’ve got to put your oxygen mask on before you take care of the children.

Bo: I’m going to echo what he said. You’ve got to make sure you’re at the right place in the Financial Order of Operations. Save 25% for yourself and your future before you save for the kids. But let’s assume that you’re there. You also ask whether you should do the maximum the state allows for a tax deduction. $440 a month, let’s round to $400, that’s $4,800 a year, call it $5,000. If you start doing that when your child is brand new, $5,000 a year growing for college over the next 18 years is going to grow to a ton of money. So I would even do the exercise of projecting out, do we really need to save $440 a month? Or if our kids are likely going to go to a state public school, maybe $440 a month is overly aggressive. Maybe if you just saved $100 or $200 a month, that would fit the bill. I never want to let the tax tail wag the investment dog. Figure out what you should be saving for college and save that amount, rather than saving a certain amount just for the tax deduction. Five grand a year for a brand new baby is going to add up to a lot.

Brian: And looking at the broader question of education, a lot of people are putting a question mark on its value because of student loan issues and the return on investment questions. But I still think it’s a good thing. I just had my oldest daughter graduate college, and the 529 was a blessing to us because the compounding growth built up a nice egg that covered three years of her college. And I was only doing $2,000 a year, which was what Georgia’s benefit was back then. Good stuff. Thank you for the question, Kyle.

Q&A: Raising Kids with Money Without Creating Entitlement (53:16)

Rebie: We’re going to go to Jack’s question. It says, “Hey Money Guy team, how do you enjoy the benefits of financial success without unintentionally raising entitled kids? What’s your approach to instilling work ethic and gratitude while also enjoying your money?”

Bo: This is the number one conversation my wife and I have around finances. Our children are growing up in an environment that is very different than the environment that either one of us grew up in. I grew up in an environment where there was no excess, there was no frothiness. There was just sound financial decision making. A lot of the reasons why I turned out the way I did, I’d attribute to seeing the other side of it and being on the wrong end of that equation. A lot of the things that made me want to work hard and do good in school and be successful came from that. Well, if my kids aren’t going to face that same level of adversity, how do we make sure they still get those same skills? It’s a really, really hard thing. So what we’ve tried to do with our kids is be very, very open with them about what we expect of them. My oldest, she’s 11 now, and she has a job in the neighborhood. Every Thursday she goes and pulls the trash cans out for neighbors. Every Friday she goes back and pulls them in. She gets the money deposited into her bank account. And last night her bank statement came in. She made $5.52 in interest so far this year. An 11-year-old with free money showing up in an interest-bearing account. I want them to understand: hey, we save, we have a goal, and we’re moving towards this. One of the things me and my wife have to do is be careful not defaulting to convenience for us. When something breaks or they run out of something, I can literally pull up my phone, order on Amazon, and have it there by 4 a.m. tomorrow morning. But I don’t know that that’s the right response even though it’s easy for us. Hey, you broke that thing, we’re not just going to replace it. We’re going to wait. We have to be very intentional around how we don’t operate at our convenience level, recognizing that our kids need to experience a little bit of the inconvenience.

Brian: Let me give you some context. I think every parent who has money should be scared to death because the stat that consistently exists is that most millionaires are first generation. 80% of them. Even our own research is around 75% of our clients are first generation. We’re both first-generation millionaires. That means for that stat to be true, 70% is gone by the kids of that first-generation millionaire, and 90% is gone by the grandchildren. Anybody who has resources or is growing up with resources should be like, Holy cow, maybe growing up with money can be just as scary as growing up in scarcity because they lose some of the right mindset. So I’ll give you the cliff notes. Experiences over stuff. Don’t give your kids everything. We all know friends who seemed like they had every G.I. Joe, every Transformer, even the aircraft carrier for G.I. Joe. Or think back to when your friends got brand new Jeeps or fancy cars in high school. Did the parents do that for the kid or for themselves? And by the way, I live in a very wealthy community. I tell people asking me these questions and then they do the exact opposite. Whatever, you do what you want. But here’s what I’ve done for my daughter and I’m pretty pleased with how she turned out. She just graduated college and she’s a hard worker, she values money, she’s a great saver. What I did was start having very clear discussions about how money works probably starting when she was 13 or 14 years old. I tried to instill the skill set early. If you can start creating mastery or building that knowledge and experience at a young age, it actually can turn into a benefit instead of a weight around their body. And as soon as she started babysitting and then working at Chick-fil-A through high school, I primed the pump. I said, “Hey, I also opened up a custodial Roth IRA and I’ll do a dollar-for-dollar match into your custodial Roth IRA.” Her eyes lit up. And then it went on even to the first car. Having money and a daughter getting close to 16 is really hard because I knew Dave Ramsey always said: make your daughter pay for half of her first car. And that is so hard when you have money. Because in your brain you’re like, well, if I buy her a new car, it’ll have the latest and greatest technology and safety features. That is a true thing. But you have to be careful. There’s a balance on making sure they have ownership. I also don’t want my child’s best experiences in life to be only while they were in my household. And if you pass down your five-series BMW to them, what are they going to do when they graduate college? What does life look like on the other side? Or are you just sending them out into the world as the bougie version of themselves right from Jump Street? These are things that carry a lot of weight when you have resources and you’re trying to create good humans who want to work hard, understand the value of a dollar, and will put that to work so they can turn it into something bigger and better than what you started with, versus that horrible stat of they blow it up either as your children, 70% likelihood, or their grandchildren, 90% likelihood. You’ve got to work against the grain.

Bo: Can I throw one thing out there? You so often tell that story about doing the dad match and the custodial Roth IRA and I love that. But you don’t have to wait until they do a Roth IRA to do that. You can do a parent match inside of a custodial account without having to do the tax return filing and that sort of thing. So don’t think you have to do all the things at once. A lot of people ask me, “Bo, your kids don’t have custodial Roth IRAs.” We’re going to get there when they get real jobs. But I have told my daughter, once her savings account hits this dollar amount, we’re going to start investing after that. And I’m going to match everything that she wants to invest. You can ease into it with your kids so it’s a gradual learning experience over time.

Brian: One thing I didn’t say: I kind of force this. I think your kids should go work a cruddy job in high school. Go work fast food, go do something that puts you out with the general public, because you’ll realize how crazy the general public is. You’re also going to realize, hey, maybe working with my brain is better than working with my back. And it creates skill sets. You learn how to deal with the general public, how to manage money, how to deal with bad bosses. There’s a lot of benefit to that. And I know a lot of my peers think it’s beneath their kids to work in those atmospheres. I think that is a mistake. If you have that feeling, your kids can sense it. You say hard work is good and is rewarded. Go out there and take that entry-level job so you can get experience and start the journey of learning to appreciate and understand the value of hard work.

Bo: This job, what we do right now, is my favorite job I’ve ever had. My second favorite was waiting tables at Chili’s. If this all folded up tomorrow, I’d probably go wait tables because it was awesome and I took away so many skills from that. And my first semester at the University of Georgia, I got to do construction for one summer in Georgia starting in August in the heat. I learned very quickly in that moment that I was going to study finance and do financial planning, because it was a wonderful experience to show me what I did not want as a vocation. The more experiences like that your kids can have, and the earlier they can have them, the better off they’ll be.

Brain: Don’t just say your kids’ job is school. Eventually they’re going to work, so you might want to introduce it before they leave the household. If their first job is after they graduate college, be careful with that. And I think this is more controversial amongst people with resources. People who grew up with less already know: go work. It’s the people with money who sometimes protect their child at the expense of their future.

Closing (1:04:25)

Rebie: I knew you guys would not disappoint on that one. I feel like today we have done nothing but filibuster answers.

Brian: We did. We were long on the IPO discussion. We answered five questions. But I thought it was all good stuff. You know, you want to go for 30 more minutes? Just let’s keep going.

Rebie: Well, thank you for joining us on the stream. Just in case you didn’t know, the conversation does not end here. We have released, I believe, six free resources brand new just in this calendar year. If you have not checked those out yet, those are always there for you at moneyguy.com/resources. Our most recent one was for folks in the military, financial planning specifically for all the unique considerations for military families. Go check that out if you haven’t yet. And we’ll be back here every Tuesday at 10 a.m. Central doing more of this, answering your financial questions, and talking about what’s going on in the financial world and what’s on your mind.

Brian: We’ve also been doing some collabs. Erin Talks Money, we had an ABLE account deep dive that she’s let us know has done really well. We were on Iced Coffee Hour recently. We’ve got more collabs coming up. It’s a pretty exciting time. I would love for everybody to go sign up to get on our newsletter list. Every Saturday I read our own newsletter because the team here does such a good job. I can’t wait to see how they’re either roasting us or what unique content they’ve put in that newsletter. We’re not out there selling our newsletter list. We’re just trying to make sure we know who’s out there and part of the family. I’m your host Brian, joined by Mr. Bo, Rebie, and the rest of the content team. Money Guy out.