This Will Change How You See MONEY…

Unveiling the Compound Interest Calculator (0:00)

Rebie: This show might change the way you see money and it’s definitely going to tell you if you’re on track. And we’re unveiling a really exciting new tool for you.

Bo: Rebie, I am so excited about this because this is something that is a long time in the making. I mean, you hear us talk about things here like the wealth multiplier or like the know your number tool or all these different things where we use math to help you figure out how you turn money into the ultimate goals that you have, how you use it as a tool to accomplish the things that matter to you. Well, at the very base of that, like the very smallest form, what’s happening when we put our money to work for us is we are allowing compound interest to take place. We’re allowing our dollars to begin working even harder than we do with our back, with our brains, and our hands. And we are so excited because we’ve wanted to do this forever, and we’ve actually done it. Our team has built a tool and it is absolutely free for you guys that will change the way you see money.

Rebie: We thought it was long overdue to give you a money guy compound interest calculator. So, it’s going to show you what your investments and contributions can actually turn into. And we’ve got some really fun extra money guy spins and extras. Once you get that graph that shows you the growth, it’s going to show you more about how you can hit your goals or accelerate your goals. And we’re going to show you all of that today on the live stream. And it’s all a free tool on moneyguy.com/resources that is ready to roll for you today.

Bo: I have a question for you. When you get like a new toy or a new gadget, are you one of these people that like takes the instruction manual and just throws it out and starts like trying to play with the toy or gadget? Or do you read the instruction manual to understand how to use it?

Rebie: Well, I usually like start playing with it and then end up at the instruction manual.

Bo: You know what? I would have guessed that. I would have guessed. I use it every time. 100%. I do because I never want to misutilize a tool. I never want to like miss all the cool features. So like, you know, when I got my very first iPhone back, you know, 100 years ago, I was like, I want to know all the things that this thing can do. And so we thought maybe obviously you can go to moneyguy.com/resources and you can check out the compound interest calculator and you can play with it for yourself. But I thought it might be helpful if we walked you through a few different ways you can use it. So that way you can actually see in real time how can I use this to inform the way that I make financial decisions.

Example 1: The Early Starter at Age 28 (2:30)

Bo: So let’s assume that you listener out there are an early starter and you’re trying to figure out, okay, am I doing enough? Well, here’s one of the ways that you might use a calculator. Let’s say that you are 28 years old and you’ve got $50,000 saved up. We’ve been following the financial order of operations. And so the amount that you are currently starting with is $50,000. All right. So, we type in $50,000. Let’s also assume that that’s $500. That would be a 28-year-old who’s absolutely killing it. You should go to moneyguy.com/become-a-client if that’s you. Let’s assume that the annual rate of return is going to be 9% because this is someone that’s younger with a longer time horizon. They’d be more aggressive. And let’s assume that they are saving $1,000 on a monthly basis. So, $12,000 a year. They are 28 years old. So, let’s assume that they’re going to invest for the next 37 years and they’re going to have a normal retirement at age 65. You put all of this into the compound interest calculator. You hit calculate and watch what happens. It gives you just a plethora of information. And we wanted to highlight some exciting things that the calculator will tell you. Let’s start with sort of the basics first. The very first thing it shows you is, hey, we talk all the time about how it’s so important to build to $100,000 because once you hit that point, you are now at the boiling point. You are now at the point where your dollars can really begin to build momentum and pick up steam. The boiling point is the point that you have to hit and we show you when that happens. So in this scenario, this individual would hit that in year three. Well, we also show you based on this current trajectory that this person is on when they hit liquid millionaire status. And you can see that for this specific example, they’ll reach their first liquid million in year 21 at age 49. And you can see that if they continue on this trajectory all the way out until they get 65, they will have an ending balance of just under about five million bucks. So that’s the basics. That’s kind of the exciting part about it. But we didn’t want to stop there. We wanted this to be a tool that you could use to not only figure out, okay, based on what I am doing now, where am I headed? We wanted you to be able to figure, okay, how can I change my behavior to impact what the ultimate outcome looks like? So, let’s assume that this person says, okay, I know because maybe I’ve done the know your number course or I’ve read some articles and by the time I retire, I really want to have $7 million. This is not $7 million. We have like a $2 million shortfall. So, if you scroll down just a little bit, it will show you, hey, do you realize if you just saved $100 more a month starting right now, this is how much more you could have at retirement. If you saved $200 a month, this is how much more you could have. Or if you needed another million dollars, how much would you need to save more? And so, in this example, this individual, they could save an extra $282 per month. That would result in another million dollars by retirement. So, if they need $2 million, you would just double that amount. So, if they could save an additional $564 each month, they would be on their way to a $7 million retirement value.

Rebie: And that’s pretty exciting. And that’s doable. It shows you what you need, I think. If you’re just looking for a road map to kind of see how you can get to where you want to go, this is a great way to do that and start that conversation.

Bo: I love it.

Example 2: The 40-Year-Old at a Fork in the Road (6:01)

Bo: All right. You want to do another example? Let’s do another example. Walk again, this is I want you guys to recognize how this can be a tool to help you navigate your financial life. Let’s assume that maybe you’re at the fork in the road. Maybe you’re someone who’s 40 years old and you’re trying to think about should I begin saving more? If I begin saving more, what are the implications of that? What would be the outcome from that? So, let’s assume that you start with $400,000 at age 40. Let’s assume that you have an 8% rate of return that you want to assume. Let’s assume that you’re saving $30,000 a year currently and you want to retire a little bit early. You don’t want to go all the way till 65. You want to retire at 60. So let’s say that you’re going to invest for 20 years. When you go down and you hit calculate based on this, what you can see is first you’re already at the boiling point. You have $400,000 saved. So you’ve already reached your first $100,000. You’ve already done one of the hardest parts in the wealth building journey, but you’re not quite in the two comma club yet. If you continue on this trajectory, you will actually hit a million dollars in year eight, and that comes right around age 48. And you can see on this trajectory, you get to about $3.4 million. But remember, this couple said, “Okay, this is what I’m on track for. What if I just saved a little bit more? What if instead of saving $30,000 a year, I save $40,000 a year?” Well, now you can see if you save an additional $40,000 a year, it adds almost half a million to your terminal portfolio value. So, you can play with your savings rates to see how your behavior impacts what your future financial life could look like. But now, let’s say, okay, well, you’re worried. You’re reading the headlines and you’re seeing that, man, okay, I don’t know that the market’s going to perform well and maybe the last 20 years, the next 20 years won’t look like that. What if I don’t achieve an 8% rate of return? What if I only achieve a 6 and a half% rate of return? How does that impact the numbers? You can play with all of these assumptions and all these numbers with our compound interest calculator at moneyguy.com/resources. So, we think this is a wonderful tool that you can use. It’s something that’s out there and readily available for you because we really do believe that there is a better way to do money. We believe that these kind of tools you can use so that you can stay on the path towards true financial freedom.

Rebie: Yeah, I’m really excited for you to use it. Let us know what you think. Again, moneyguy.com/resources is actually the very first calculator on the list. So, should be really easy for you to find, too.

Simplifying Your Roth IRA Holdings (10:04)

Rebie: Okay, we do have a question queued up from Chris K. He says, “In the most recent Making a Millionaire episode, you talk about the 17 funds in the Roth IRA.” She had a lot going on in her Roth IRA and was kind of over complicating it. Can you speak more to when you should include more than just one or two index funds? Like, is it ever, do you ever need more? Like, what does that actually look like?

Bo: I love that. For those of you that aren’t familiar, for those of you that have not subscribed, step number one, make sure you subscribe right now so you know when we have new content coming out because yesterday on Monday, we had a brand new Making a Millionaire episode come out where we sat down with Megan. We’re basically looking at her financial life, trying to triage and discern, okay, where is she at and where is she heading? And one of the things that we noticed is she had these different types of accounts. And in every one of her accounts, she just had a ton of holdings. You know, she had eight in this holding and 10 in this holding. And Chris just reminded me she had 17 different holdings in her Roth IRA. And so, one of the questions that we would ask a client or one of the questions that we ask Megan is, “Hey, why do you have these 17?” You know, a lot of people, they will, you know, watch YouTube shorts, they’ll listen to a podcast, they’ll read a book, and they’ll hear, “Oh, you know what? I hear that diversification is a good thing. So, I’m going to go buy a whole bunch of different things. And if I buy a whole bunch of different things, I’m going to be well diversified.” Well, you can think about it like going to the grocery store. And if you go to the grocery store and you just go to one section, the produce section, you may buy some bananas and you might buy some apples and you may buy some grapes and some strawberries and some blueberries. And I’m running out of berries to think of. You buy all these different kind of fruits. You may feel like you have diversified what you got at the grocery store, but all you really did was you bought a whole lot of one thing. You bought a whole bunch of fruit. You bought a whole bunch of the same thing. You did not venture out and actually add any true diversification benefits to your diet. Investing is no different. It’s not uncommon. We’ll even look at somebody’s portfolio and they may have US large cap growth and then mega cap growth and then you know North American growth and they’ll just have every single fund that has growth in it. When you actually look at the underlying holdings, all of those funds are buying the exact same stocks, investing in the exact same companies. They just have subtle differences. And so while you may think that you’re diversified, you may not be. So buying a whole bunch of holdings does not necessarily mean you’re diversified. But I think for Megan where she was at, and I think this is what Chris K’s question is. Okay, well do I just buy one fund? Do I just stick to one type of investment? Well, the answer is it kind of depends. You’ve heard us talk all the time that we love low-cost index funds. We love things like the S&P 500 that’s super low cost that gets you broad diversification across 500 different US large cap holdings. But we also love things like target retirement index funds where with a target retirement index fund you only have to answer two questions. Question number one, how much can I save? Question number two, when do I think I’ll need this money? So, if I think I might need this money 40 years in the future, I would go select the target retirement index 2065 fund. And what it’s going to do is right now where we’re way off from 65, it’s going to be more aggressive. And then as we move through time, it’s going to naturally become more and more conservative. It’s going to auto-allocate for you. Well, if you’re someone in the stage of your financial life cycle where it makes sense to use something like a target retirement index fund, it’s okay if you have one fund. It’s okay if that’s the only thing you have. So, if I look in your Roth IRA, I see that fund. And I look in your 401(k), I see a similar type fund. I look in your after tax account, I have that fund. That’s a fantastic solution because early on in your financial journey, your savings rate is exponentially more important than your rate of return. So, you should focus all of your attention, all of your effort on how do I save more, put more away, get more working for me, not how do I, you know, slice up the pie so that I can really optimize return. Now at some point you will reach a critical mass, right? And you have to kind of define what that is for yourself. In our mind it usually happens somewhere around three, four, $500,000 of investable assets where okay maybe now the generalized solution of a target retirement index fund is not the perfect solution. What I need is I need a personalized solution where not only am I thinking about asset allocation, how I spread out my assets, I’m also thinking about asset location. What types of accounts do I hold? Which types of investments? Once you hit that critical mass, three, four, $500,000, then you can begin to really hone in on the benefits of that strategy and your rate of return begins to become more important. Up until that point, I think you’re just majoring in the minor. So the question Chris that you asked is okay when is one fund enough? Early on in your journey till you get to that critical mass. So then once I get there does it mean I need 100 funds? Not necessarily. It just means you need to understand if I’m buying a holding in my portfolio I’m buying it for a reason. I buy US large cap because I want large cap exposure. I buy international developed because I want international exposure. I have fixed incomes because I want fixed income exposure. So on and so forth. You just want to make sure that when you’re beginning to make those allocation decisions, you understand what it is that you’re doing. We actually did a great show. Oh my gosh, I can never remember the names of our shows.

Rebie: I might be able to help. What did we talk about? It was a portfolio show where we stacked up a couple of different types of portfolios. Financial advisers rank the most popular investment portfolios.

Bo: Say it again one more time.

Rebie: Financial advisors rank the most popular investment portfolios.

Bo: I love it. If you are curious about asset allocation and how to structure a portfolio, how to design a portfolio, how to think about that, it’s a great show because we walk through some like really nerdy, really deep investment type stuff. I would encourage you to check that out if you have not.

Rebie: Really popular one, too. And I like the grocery store analogy first of all.

Bo: Did that one work?

Rebie: I think it did. Yeah.

Bo: I got halfway in it and I was like, is this going to make sense? Because I was like that you are diversified in terms of your fruit selection, but you’re not diversified in terms of your diet.

Rebie: And then I have to give one more shout out to Megan, our Making a Millionaire guest that this question was inspired by. She was just so lovely and so relatable. Whether your financial situation looks exactly like hers or not, like I think some of her struggles and pain points are very relatable. So definitely go check out her episode. It’s called Her Finances Need a Total Reset.

Bo: So yeah, I had a lot of favorite parts about Megan, but you know, one of the parts that was not my least favorite that you should listen to it for no other reason, she had an amazing accent. She did. Her accent, just that South African, I could listen to it forever. So yeah, that’s an added bonus for sure. Just kind of fun to listen to.

Rebie: Okay. Well, Chris K, thank you for your question. It is a tumbler day as we said, so just email [email protected] since we answered your question on the show.

Roth IRA vs. 401(k) Without a Match (17:19)

Rebie: Next question is from Viddax. It says, “My wife is returning to the workforce this month after a few years as a stay-at-home mom. Her employer does not offer a match to her 401(k). Should we start a Roth IRA instead of contributing to that matchless 401(k)?” What do you think?

Bo: Rebie, this is a great question and we have a step two question, right? 401(k), but it’s not free money. So, what do you do? There is a way to figure out the answer to this. Rebie, will you hold the thing up? Oh, she don’t know where it’s at. Look, I got we got a secret drawer over here. We got a secret drawer. Here it is. Financial order of operations, moneyguy.com/resources. We have get your copy for free. We have a systematic process, nine steps that will allow you to figure out what should I do with my next dollar. And what Viddax is asking is, okay, I understand that in step number two, I’m supposed to go get my employer match. I’m supposed to be able to maximize that free money because it might be a 50% or 100% rate of return. So, we can’t go away from that. So, I want to do that, but my wife is going back and that’s not there. What should I do? Well, if you have no employer match to get, well, then you just begin going to the next steps in the financial order of operations. So when you move from step two to step three, you get to high interest debt. Well, do you have credit card debt, consumer debt, high-interest student loan debt, high interest auto debt. If you have those kinds of things, you want to make sure you extinguish those inside of step three. Once you have all your high-interest debt knocked out, then you go to step four, fully funded emergency reserve. You want to make sure that you have somewhere between 3 to six months of living expenses in an emergency fund liquid account so that you can keep your life out of the ditch. Well, now once you’ve done that, then you get to where Viddax is. Then you get to step five and you say, “Okay, I wasn’t able to capitalize on the employer 401(k) because there was no free money, no match. Now, what I’m going to do in step five, if I’m a part of a high deductible health plan, I’m going to go max out my HSA.” If I don’t have that or maybe I’ve already maxed out my HSA, then I’m going to go to a Roth IRA. So, I love the idea of it. If you’re working through the financial order of operations, you can’t do the employer sponsored plan. That’s okay. Knock out that Roth IRA. And what you’re likely going to find is your wife is going back to work, so income is going to increase for the household. Maximum Roth IRA contributions this year of $7,000 for those under 50. There’s a good chance that she’s going to go knock that out and her Roth IRA will be maxed out. So then where do you go? Well, then you get to step six. We hold the thing up again one more time for me. Max out your employer sponsored retirement plan. This is the point where after you’ve done the HSA, after you’ve done the Roth, now you can go back to the 401(k). And there are still, even without a match, 401(k)s can still be incredible benefits because you can get tax deferral on current income if that’s what makes sense for you. You might be able to get Roth growth on that if that’s what makes sense for you. So even without the employer match, employer sponsored retirement plans are a fantastic savings vehicle because there are still tax incentives even if it’s not like free money tax incentive. So yes, Viddax, I think that doing a Roth is a great idea so long as you’re working through the financial order of operations in the right way. And congratulations to your wife for heading back into the workforce. That’s exciting.

Rebie: Viddax, thank you for the question. If you would like a Money Guy tumbler, just email [email protected] and we will send one out to you.

When Life Insurance Fits Into Your Plan (20:58)

Rebie: All right. Abtahi R has a question for you. “Why doesn’t buying term life insurance and umbrella insurance come after step four in the FOO. Should we focus on building wealth with HSA and Roth IRA if we can’t protect in case there’s a big oopsie?” I think this is a misunderstanding. Can you clear it up?

Bo: It’s for sure a misunderstanding. So we do some episodes. Oh my gosh. What’s the name of these episodes? We’re really going into the heart where we walk through the pyramid. Financial planning 101. Is that what it’s called? Did I just nail that?

Rebie: I think so. Yeah. Awesome.

Bo: So we walk through some content, Abtahi, where we’ll talk about when you’re like designing a financial plan, you kind of work up this pyramid. You start with sort of the baseline, then you move to the next and you move to the next. Well, the financial order of operations is specifically about like where do I deploy my dollars when I’m ready to start building wealth for the future? I’m ready to start like building towards the future. Before you even get to that step, before you even start doing that, one of the things you have to make sure that you have covered is risk management. Risk management is kind of like that very bottom of the pyramid, very bottom of the pyramid, that baseline. So, if you’re someone who has people depending on you, maybe you have a spouse or maybe you have children or there are other people that depend on your ability to produce income for their livelihood and their well-being to an extent that if you were no longer here, they would be in a very difficult tough spot. We would argue that you have an insurable need on your life. And one of the best ways that you can solve that is by inserting insurance to be able to protect against that need. So life insurance, specifically term insurance, is a great way to do that. Oftentimes for a brand new family starting out, and they’re like, “Oh man, hey, I really, I’m so gung-ho. My wife and I, we just got married. We just had a brand new baby. We’re ready to start saving. We want, we’ve listened to the show. We want to open up that Roth IRA. Let’s do it.” The very first question we ask them, “Hey, hey, that’s awesome. Before we get there, let’s talk about some of the risk management stuff, right? Where are you in terms of your life insurance? Do you have a will in place that says, “Hey, if we get hit by a bus, here’s the person that’s going to take care of our kid.” Because if you think that conversation’s hard and it’s a difficult, I mean, you got young kids. It’s a hard conversation. Strange conversation, but it’s worth having now because, and it’s true. You always say, “How much harder will it be if you’re not here to even speak into it?” Right. That’s exactly right. So, you would rather make that decision than have someone else try to guess what your decision would have been. So, we tell people in that stage, hey, yeah, you got to make sure you have a will in place. You got to make sure you’re covering that. Well, part of that risk management is also, hey, make sure you have life insurance. If you’re someone who has assets that are built up, you want to make sure you properly insure those assets through your auto coverage, through umbrella insurance. So, those are not steps of the financial order of operations. Those are kind of riddled through. That’s risk management. Now, you may be someone who is young and just starting out in your career and you’re not married and you’re early on and you don’t have any assets. You don’t own anything yet. There’s a good chance you don’t need life insurance, right? So, like no life insurance. There’s a good chance if you’re early on in your career, you may not need umbrella insurance yet either. So, it’s one of those things that those things will be part of your financial life, but when they become part of your financial life, they have to become a top priority. So, it’s not like a step in the FOO, it’s a step in the life cycle that you’re in.

Rebie: It’s just, yeah, it depends on your situation, not what step you are in the FOO. So, that was a great explanation. And the nice thing is term life insurance, I mean, we can’t speak totally blanket statement here, but it’s not crazy expensive. No, it’s super cheap, especially for, you know, young families who really do need it. Like so it’s totally reasonable to fit it in to the FOO wherever you are.

Bo: You know, life term life insurance is one of these interesting ones. I’ve never had someone complain about paying for it who received a benefit, right? I’ve never heard someone say, “Ah, sure. It’s just this is too much life insurance.” That’s not a thing that happens. And I’ve also never had someone complain about paying for it and never having to utilize it, meaning, oh man, I bought 20-year term and I’ll live 21 years. No one’s ever upset at that. That’s like a wonderful thing. Life insurance, in our opinion, is a temporary solution to a temporary problem. If you’re doing things the way that you’re supposed to be doing and you’re building wealth the way that you’re supposed to be building and you’re moving along in your financial journey the way that you’re supposed to be moving along, odds are at some point you’re going to be self-insured. Meaning you no longer, if you were to get hit by that bus tomorrow, you don’t need the life insurance company to step in and take care of your loved ones. You have built an army of dollar bills large enough that it can do that for you. So life insurance, you want to get the most amount of coverage you can at the lowest cost possible and you just want to race to get to the point where you actually don’t need it anymore. And if you do it that way, you’re doing life insurance the right way.

Rebie: That’s good stuff. So, Abtahi, if you would like a Money Guy tumbler, since it is a tumbler day, we’d love to send you one. Just email [email protected].

Saving for After-Purchase Home Costs (29:32)

Rebie: Natalie K has a question. All right. It says, “We are at step five of the FOO and are starting to save for our first home in 2 to 5 years. How much should be set aside for after purchase costs on top of the emergency fund?” Good question because you definitely want that emergency fund or at least very close to it to be left after you purchase the house because you never know what’s going to happen, right? Especially with a new house.

Bo: This is honestly this is a pretty hard question to answer, Natalie. But it’s the right question to be asking. I’m always amazed, specifically with young people, when they’re like so excited to buy their first home and they’re like, “I’m going to save save save save.” And they’re like, “All right, I’m going to go buy this house and I need a $20,000 down payment.” And they, you know, in their savings account, they hit $19,995 and they put that last $5 and hit $20,000, they go buy the house. And I’m like, “Whoa, whoa, slow down. Slow down.” If you put all of your money in the house, what you don’t recognize is that after you close, after they hand you the keys, the costs don’t necessarily stop there. I remember for me, I bought my very first house when I was 21 years old. It was not a wise decision. It was full hearty of me. And I literally remember I got the keys. I went and I’m like, “Look at this mansion that I live in.” And then I noticed every window I could see straight outside, right? And I noticed that if someone was standing outside, they could see straight inside. This is like bathroom windows, bedroom windows. I was like, “Oh my gosh, I got to have something for these windows.” And I was like, “Oh, I’ll just look up some blinds.” And I looked up. I was like, “Oh my gosh, that’s so expensive.” Especially if it’s all your windows, right? So I went to Home Depot and I bought a bunch of like $8 paper blinds, which doesn’t, I know it sounds silly, but like it added up because they’re a bunch of windows.

Rebie: Young, too. It’s not like you were, you know?

Bo: And so like I didn’t even think about that. And then I was in the house for like gosh, I think maybe a week and a half, two weeks. I closed in summertime or like early spring and the grass started growing and I was like, “Oh my gosh, I don’t have a lawn mower. I got to go buy a lawn mower.” And like you don’t recognize that there’s all these different costs. So Natalie, how much do you save up? Well, it depends on a few factors. One of the factors is what kind of home are you buying? Are you buying a home that has been built for a while that someone else has lived in for a while? Are there things that might need to be coming like maybe it’s going to be coming up on the time to put a new roof on or maybe the HVAC system, you know that like if it’s an old HVAC system you got to be ready.

Rebie: That’s right. That’s right.

Bo: So how much should you have saved up? It depends on, and this is where you have to kind of put on your math brain, probabilistic outcomes. Like, what’s the probability that if I buy this house and it comes with utilities, I have to replace the refrigerator, replace the washer and dryer, I have to, you know, you fill in the blanks of the things that you think you might have to do and say, okay, what do I think those things could be over the first year? Well, I’d like to have at least a big chunk of that covered. Now, the great thing is if those things don’t happen, you’re okay. You have that money sitting there and then you can kind of continue to build, but you don’t want to take your emergency fund all the way down to zero. You don’t want to be so lean that all of a sudden the HVAC goes out and you’re like, “Oh my gosh, I can’t fix this. I have no capital.” The only solution is to put it on the credit card. And then you get yourself into a really bad spot. So, I would look at the home that I’m buying. I have my emergency fund sitting there. I have my down payment that I’m going to use. And then I would figure out, okay, what are the likely and probable additional costs, whether that be window treatments or furniture or appliances or other things like that. And then what are the maintenance items I might have? And I’d come up with just a spreadsheet of the potential costs. And then I figured, okay, where is my comfort zone with all these likely expenses I could have and what’s the probability that they’ll happen? And I would shoot for that number. I wish that I could tell you it was oh well you just need exactly and there are some rules of thumb you can go Google it there might be like 1% of the value of your home or but that stuff is total crap because the 1% of a brand new home versus 1% of a 35-year old home is just different, right? So I would think about realistically what expenses do I think I could incur and I’d shoot for that number to have so I knew that I’ve got some liquidity post close.

Rebie: Yeah, no, that’s a good answer because it certainly is one of those it depends, but you should think about these factors. And that was a great answer. So, Natalie K, if you would like a Money Guy tumbler, since we answered your question, we’d love to send you one. Just email [email protected].

How Raises Factor Into Savings Milestones (34:16)

Rebie: Ranata has a question for you. How do raises factor into how much you should have saved by age? I’m in a lower paying job, hoping to switch to a better paying job in the industry soon. I’m 25 and almost have one times my income invested, but now it says am I behind, right? And I think this is a great question because we do a lot of kind of episodes about benchmarks, milestones, what you should have by age, which is super helpful, but some people have kind of varying incomes or big life changes whether in the positive direction or the negative direction. So, how do you factor that in to know if you’re still on track?

Bo: So, financial mutants, they have this problem all the time. We, and by the way, I’m saying we because you’re in good company. We just like a little, we’re like a good pet. We just want like a little scratch behind the ear. We just want like a little just like a good boy, good girl, right? Like that’s what you want. And so that’s a lot of these milestones that we talk about. Hey, by the time you hit 30, you ought to have one time your annual salary saved up. Or by the time you hit 40, you should have three times your annual salary saved up. So on and so forth. And we’re like, man, I just want to check the box. I want to be able to say that I did it. But, you know, I’m 29 years old and I get this big pay raise and I was going to have one time, but now I got this pay raise or I changed jobs or I move vertically and now I’m not there. Oh, no. Am I behind? Well, are you behind? No. Has your lifestyle automatically adjusted to that new income? No. Are you probably right where you should be? Absolutely. Do you now have a great opportunity to be able to save more and build to try to get back to that metric? Absolutely. So, what are some tools that you can do? And we tell this to people all the time. We have a, there’s a great formula you can use. Dr. Stanley wrote about it, Millionaire Next Door. You take your age, multiply it times your income, and divide by 10. That’ll tell you where you should be if you want to be an average accumulator of wealth. If you want to be a prodigious accumulator of wealth, you double that number. But what we found is for young people that’s a hard thing to do, right? That’s a hard metric to hit. So we, you know, sprinkled a little money guy dust on it to change the formula a touch. And we said, “Hey, why don’t you do this? Take your age, multiply it times your income, and then divide it by the number 10 plus how many years until you turn 40.” So if you’re 32 years old, it would be 10 plus 8. So your denominator would be 18. Well, that will tell you, okay, where you should be. Well, Ranata, you’re having the same question. My income just went up. How do I, if you’re going to do any sort of these formulas or you use any of these things? If you’re someone who has variable income, there’s nothing wrong with averaging your income over the past couple years. Okay, I make this income now, but over the last three years, it averaged to this or over the last five years. That’s totally an okay thing to do knowing that, hey, with this raise, I’m going to have a higher burden of responsibility saving because here’s what I don’t want you to do. Oh, okay. Well, Bo said I was good because, you know, I’m almost at one times now. Yeah. So, I’m just I got this raise. We’re going to go live large. And don’t misunderstand me. I want you to increase lifestyle. I want you to enjoy the fruits of being able to make more money, but not all of it. So, if you get a raise or you get a bonus, maybe go like the 60/40. Hey, here’s what I’m going to do. I’m going to let 60% of this go to savings or maybe if you’re already in a fantastic place, let 40% of this go to savings. I’m going to let the remainder of it go towards lifestyle. That’s okay. So long as your lifestyle creeps up, so too does your savings behavior. So that you don’t find yourself in a spot when you are 35 or 45 saying, “Oh man, I’m behind. My savings rate didn’t keep up with my lifestyle.” So long as you’re protecting against that, you’re okay. So don’t be so hard on yourself. And as a matter of fact, celebrate and congratulate yourself. Hey, I just got a raise. Hey, I just changed jobs. I’m increasing my income. Those are all net positive good things. Now turn that increased income, turn that shovel into real wealth.

Rebie: Yeah, that’s really good. And we always break it down for you. So, I love that we explained that Millionaire Next Door formula and how we changed it. But remember, if you want to go just have that calculated for you, go to moneyguy.com/resources because we actually have a prodigious accumulator of wealth calculator for you.

Bo: I shouldn’t have given the formula. I just gave it away. I shouldn’t tell. Forget everything I said about the formula.

Rebie: Do the math, but this is the easy way. Now, they understand it and they can do it the easy way. It’s both.

Bo: I forgot that was out there.

Rebie: I know. It’s a good one. It’s a really good one. So, you can use whether your income now or that average like Bo said and actually see kind of where you fall. And so, you can use it today and then you can use it as a check-in point in the future, too. Moneyguy.com/resources.

Bo: Can I give one more shameless little plug here?

Rebie: Absolutely.

Bo: So, I love calculating your your money guy wealth score, right? That’s what we call that, your money guy wealth score. We’re doing that formula. One of the things that’s awesome is if you’re someone who uses our net worth tool, right? You can go to learn.moneyguy.com to check that out. One of the things we actually track on there is current year, your current money guy accumulator score. But in the bottom left, we actually have this tracker that tracks your journey to abundance. And what it’s really tracking is where am I? So when I was 25, maybe I was an average accumulator, but now that I’m 30, okay, now I’m moving towards prodigious. And it actually shows the path through time. So, it’s really really exciting if you are someone who’s tracking your net worth every year, which you should be. You should be doing that every year. It gets exciting seeing how that changes through time, even with income increases, even with income bumps.

Rebie: Yeah. No, that’s good stuff. So, Ranata, great question. Be sure to go to moneyguy.com/resources to use that calculator and also email [email protected] because we would love to send you a tumbler as a thank you.

Refinancing vs. Maxing Out Roth IRA (40:19)

Rebie: Okay, Isaac G says, “Which is better?” You ready for this? Okay. Refinancing my house. It’s currently at a 7.625% fixed rate with $266,000 remaining and 29 years left on the loan. So, first choice, refinance my house or max out my Roth IRA. My wife and I are 23 on step five and can’t do both. What do you think?

Bo: Here’s I’m going to use my context clues here. You owe $266,000. Yes. 29 years left on the loan. Do you know, Rebie, this is not a trick question. You know the normal term for mortgage loans. When you take out a mortgage loan, you know how long they normally are?

Rebie: 30 years.

Bo: 30 years. Pretty common. So, I’m doing some math here. 30-year mortgage. We got 29 years left. You just bought this. You just went through all of the 7.6 interest rate. It’s hurting him. Yeah, I get it. I understand. But you realize every time that you close a loan, that’s the terminology used when you buy a house and even when you refinance, it’s called closing a loan. There are going to be costs associated with that. And the cost can vary from one to two% of the value of whatever the loan is. So if you’re only one year into this, you haven’t likely even recouped the costs of the initial like the price appreciation of the home is likely not even recouped the cost that you had for closing on the home. So okay, you could refi and you could use that money to pay for that and there’s some math you could do on that. But man, what I would really think through is one, where are rates currently? Money guy team GPT, what are rates currently? What, six and a half, right? Right around there, prevailing 6.5, 6.8 is what they’re telling me. So, yeah, you could save a little bit on this loan. But what if rates continue to fall? What if we see rates get closer to 6% or maybe what if we just get crazy and we see rates in the fives? I’m not suggesting that could happen, but it’s not like we’re so far below 7.625 that I’m like, “Oh, yeah, you got to capitalize. You got to capitalize.” So, I would think, and because what you don’t want to do is you don’t want to get in this habit of every year I’m just going to refi. I’m going to refi because you’re going to end up spending a ton of money on closing costs. So, that’s like one side of the equation. On the other side of the equation, you’re 23 years old. I want you to go to moneyguy.com/resources and I want you to look at the wealth multiplier. I want you to look at the wealth multiplier for a 23 year old. Now, I don’t have them memorized. I should, but I know the wealth multiplier for a 20 year old is 88. So, every dollar can turn into 88 times. That means that for a 23 year old, it’s still going to be in the high double digits. You have it for me?

Rebie: 57. Almost 58.

Bo: Really? Almost 58. So, every dollar you invest that you put to work inside that Roth IRA has a potential when you retire to turn into $58. So, I can have this $1 turn into $58, or I can have this $1 go save me 7.625% in interest this year. While I like the idea of saving the interest, and I like the idea of you not having to pay that, and I like the idea of having a lower rate, when I look at these two and think about what’s the most valuable, best use of my next dollar, man, I think I’m leaning towards that Roth IRA. I think I like the idea of you having an eye towards refinancing or let me tell you a little secret. Isaac, you said, “I don’t have enough to refinance or to do my Roth IRA.” There’s another little thing you may not know about. Have you called your mortgage company and asked for a rate modification? It’s the language you want to use. You can call them and say, “Hey, mortgage company, I noticed that rates are six and a half percent.” And I just got this email from, you know, ABC loan company and they said they would love to hold this mortgage for 6.5%. Rather than me having to move it over to them and take all that and go through all that process, what if I paid you guys a couple hundred bucks and you gave me a rate modification down to six and a half? And sometimes mortgage companies will actually do that. So, it’s at least a conversation worth having, a phone call worth making because maybe you can get some reprieve on the interest rate, but still not sacrifice maxing out that Roth IRA because I love the idea of you building those tax-free Roth dollars.

Rebie: So, I mean, refinancing can be a great thing, but just based on all the things that you shared, you should consider the power of that compounding interest. For sure. Isaac, love that question. Thank you for being here. Just email [email protected]. We’d love to send you a Money Guy tumbler as a thank you.

After-Tax 401(k) vs. Taxable Brokerage (45:36)

Rebie: All right. Ronald P has a question next. If you’ve maxed out all retirement accounts, 401(k), Roth IRA, and HSA, and are able to contribute more, how do you decide between contributing to a taxable brokerage account or an after tax 401(k) account?

Bo: This is a great question, great problem to have, Ronald. So for those of you that don’t know, most people are aware that there are two common ways to put money in your 401(k). You can do pre-tax salary deferrals where you put the money in and you get a current year tax deduction. The money grows tax deferred and when you go to pull it out in retirement, you pay income tax on it. So, I’m not going to pay tax today. I’m going to pay tax later. That’s option one. The second way that people can put money in the 401(k) is they could do a Roth 401(k) contribution where I don’t get a current year tax deduction. So, I pay tax on the money. I put it in. It also grows tax deferred, but so long as I meet certain qualifying standards, when I go to pull that out in retirement, it’s completely tax-free. So, I can get a tax benefit today, I can get a tax benefit in the future. Those are the two common ways to put money in a 401(k). Well, what a lot of people don’t realize is there’s actually a third way that is lesser known, lesser talked about called after tax 401(k) contributions. And what this is, this says, hey, I can put money into my 401(k). I’m not going to get a current year tax deduction. So, it’s going to be taxed kind of like the same way that a Roth is. And I’m going to put the money in and the dollars are going to grow tax deferred. And when I go to pull that out in retirement, I’m still going to pay income taxes on the earnings, but I’m not going to pay tax on the original contribution. That’s the way that a normal after tax contribution works. What Ronald’s asking is, okay, should I take advantage of that or should I do a taxable brokerage account? Well, question number one you have to ask is, does my 401(k) allow for after tax contributions? Because it’s not a given. A lot of plans, because they want to make sure, sound like a chicken. I heard it that time. You ever hear what people say my voice sounds like a chicken? I heard that one. That one was a cluck. That one caught me off guard. Okay. That’s really funny. That one caught me off guard. Where was I going with this? I was talking about after tax 401(k) contributions. I was talking about, oh, so the reason that a lot of plans don’t have after tax 401(k) contributions is because they want to be able to pass testing at the end of the year. There’s a couple different tests you have to pass to make sure that highly compensated classes of employees are not discriminatorily favored over non-highly compensated. I’m getting way in the weeds. So, a lot of plans don’t offer after tax, but some do. Well, after tax, so I told you how it works. One of the things you can do is if your plan also allows for in-plan Roth conversions or in-plan rollovers, you can do the after tax 401(k) contribution and then you can immediately convert those dollars to Roth or do an in-plan roll out to Roth and it’s completely tax-free because remember you already paid tax on it. So it’s basically a way of doing a mega backdoor Roth conversion. It’s awesome. And here’s the other cool thing about after tax. Pre-tax deferrals and Roth deferrals are limited to $23,500 for those under 50. After tax contributions are not limited to salary deferral limits. They can go all the way up to the section 415 limits, which is $70,000 this year. That means that if you’re someone who was well heeled enough, you could do like a $34,000, $35,000 mega backdoor Roth. Okay, so that was all the context of the question. Now, to actually answer Ronald’s question, hey, which one should I do? How do I know which one to do? It depends on your personal situation. It depends on how you’re going to utilize these dollars. If you’re someone who thinks, man, I really want to retire early. I’m part of this FIRE movement. I’m part of this financial independence movement. I think that I am going to want to access these dollars in my early 50s, mid-50s. I’m going to need that, then the after tax brokerage may be your best bet because it’s going to be the place where you’re going to have liquidity to be able to cover that bridge from whenever you retire to 59 and a half when you get access to all of your other retirement dollars. On the other hand, if you’re someone who says, “Hey, you know what? I’m actually probably going to work all the way till full retirement and I’ve been building up my assets and I really have this after tax brokerage account available to me or this after tax 401(k) option. I might take advantage of mega backdoor Roth because now what you’re able to do is you are able to supercharge those Roth dollars. Instead of just doing $7,000 a year, you might be getting tens of thousands of dollars a year in there. So for you specifically, Ronald, you have to answer the question of how am I going to use, how am I going to utilize these dollars? Which one of these two would be best dependent upon where I am, my current financial situation? How are my accounts currently structured? Like how much do I have in each one of my buckets? And then when am I going to use the dollars? When do I want to be able to access them? Well, if you can define those three things, then you’ll be able to answer which one likely makes the most sense for you.

Rebie: Yeah, that was a great answer, Ronald. Thank you for asking it and I hope that helps you think through, this was a great step seven of the FOO type of question. So, congrats on being there and I hope that helps. [email protected]. Email that if you would like a Money Guy tumbler.

Should You Cash Out Retirement to Avoid RMDs? (50:50)

Rebie: Tracy M has a question next. Would it be wise to cash out all retirement accounts to avoid, I’m just kidding. I don’t even know. I didn’t even unlist this. Well, just listen to the rest. Yes. Would it be wise to cash out all retirement accounts to avoid required minimum withdrawals and put the money into an individual taxable account? I also don’t know how old she is and I wish I knew that. Maybe it doesn’t matter, but-

Bo: Cash out all retirement accounts in order to avoid RMDs. Tracy, would it be a prudent strategy if you were concerned about one day losing your hair to today, go ahead and shave your head? I’m just going bald right now, right? Like, no, I do not think this would be a prudent strategy to employ because what happens if you cash out all of your retirement accounts. What you’re going to do is you’re going to accelerate all of that income into the current year. You’re going to accelerate all of that income and you’re going to pay ordinary income tax on all of it. And if you’re under 59 and a half, you’re going to pay a 10% penalty. So, okay, Roth assets, maybe not that big of a deal. You’re not going to pay tax, but as soon as you pull them out, they stop growing tax deferred. So, they’re not working for you. With your IRA assets, they’re not going to grow, 401(k), they’re not going to grow tax deferred. They’re going to start growing after tax. So, are RMDs the big bad wolf that people think they are? Not really. They’re not really. I mean, right now, most people are not going to have to begin drawing RMDs until age 75. And maybe, depending on your age, maybe it’s 73, but 73 to 75 is when you have to start drawing that. Well, if you’re going to retire at age 60 or 65, you’re going to have a number of years between the time you retire between RMDs where you can do some effective planning to try to minimize your RMDs. And let me walk you through this. The way that a RMD is calculated is you take the year-end value of whatever your all of your IRA or RMD eligible accounts were and you divide it by some mortality factor. And I don’t remember it off the top of my head, but a couple years it was like 27.6. So you take I got a million dollar 401(k), IRA, whatever, divided by 27.6, that’s how much my RMD is going to be in the following year. Well for a lot of people if you don’t have huge IRAs and huge 401(k)s, the RMD may not be a huge number. It may be $10,000, $20,000, $30,000. It’s not going to be like these hundreds of thousands of dollars unless you have really big assets or you’re much later into the RMD cycle, meaning you’re someone who’s in like your 80s or 90s. So, I do not think that RMDs are something you have to be terrified of. There’s something you want to plan for. If you’re someone who’s going to be in a situation that’s going to have very large RMDs later in life, I would argue that early on in your retirement, you want to start planning on strategies to begin to potentially begin to mitigate that. Those might be Roth conversion strategies. It might be tax bracket maximization strategies. For example, hey, maybe this year I want to use my living expenses from my IRA. I’m going to pull out $80,000 and that’s what I’m going to live off of. And so I’m just going to pay at that tax bracket. I’m not going to go any higher. And I can do that for a number of years to buy that balance down or I’m going to convert those to Roth and then I don’t have to worry about RMDs anymore. And even when you get to RMD age, or actually it’s not even when you get to RMD age. When you get to age 70 and a half, there’s another strategy where you can do qualified charitable distributions. So, if you’re someone who likes to support causes and wants to give to nonprofit 501(c)(3)s, you can rather than taking your RMD and paying ordinary income tax on that, you can opt for some part of it or all of it to go to a qualified charity and it never actually hits your tax return. It’s a huge tax planning benefit. So, there are a number of ways that you can navigate big RMDs. This is what I try to tell my people and look, you’ll have people tell, oh, RMD tax bomb and I’m going to blow through IRMAA and oh my gosh, it’s all these horrible things. Let me remind you, if you’re blowing through IRMAA and you’re getting hit with Medicare surcharges and you have these huge RMDs, your problem is that you have a lot of money. That’s a pretty good problem to have. Yeah. For a lot of folks, what’s going to happen is when their RMDs take place, it’s just going to replace the living expenses they already had anyway. So, hey, I need $100,000 to live off of and my RMDs happen and that covers $30,000 of my hundred. There you go. A lot of our clients when they hit RMD age, it doesn’t change anything because they were already distributing more than the required minimum distribution anyways. So before you start trying to solve a problem that you may not have, make sure that you actually have that problem. We see so many people implement good solutions to problems that don’t exist. Meaning, hey, I did this thing because I heard someone say I should do this thing. They say, well, why’d you do that thing? That didn’t actually solve a problem that you have. I’m getting older. I want to put my son on this account and I want to put my daughter’s name on this home and I want to get all these assets out of my estate. And I’ll say, “Okay, great. I love that idea. Are you worth more than $30 million?” Oh, you’re not. If you’re not worth more than $30 million as a couple, you don’t have an estate tax issue. So, don’t try to begin solving a problem you do not have. RMDs fall into that exact same category. Yes, they should be planned for. Yes, they’re something you should consider, but for most people, you’re going to have opportunities if it is a problem to solve that problem before you get there.

Rebie: Good stuff. I figured you were probably going to say no here, but I really appreciate the thoroughness of that answer, Tracy. I hope that helps you. And also, I really hope that you’ll email [email protected] so we can send you a Money Guy tumbler as a thank you.

Closing Thoughts (57:04)

Rebie: Thank you so much for joining us every Tuesday at 10 a.m. Central right here on the live stream here on YouTube. And thank you for checking out that compound interest calculator. We’re so excited about it. And be sure to go to moneyguy.com/resources so that you can see that new tool, but also all of our free resources that we made just for you to hopefully help continue these conversations and just continue to help build that confidence in your specific financial journey because we know personal finance is personal. So, be sure to go check that out at moneyguy.com. And we want to know what you think, too. So, comment below if you use that new tool and if you like it and let us know.

Bo: Hopefully, you guys can tell our hearts. We love that we get to do this. We love that we get to share sound financial information with you. It’s the reason why we spend resources, we spend time, we spend effort to create these tools to make them free so that you can utilize them because we really do believe that there is a better way to do money. If we can be part of your financial journey helping you do money better, then we are all for that. Thank you so much for tuning in. As always, go to moneyguy.com/resources, check out all of these free resources, and we will see you back here next Tuesday at 10 a.m. I’m your host, Bo Hanson, here along with Rebie. Money Guy team out.