We HATE This New Money Trend…

The Buy Now Pay Later Trap (0:08)

Brian: Boy, oh boy. There is a money trend that we absolutely hate.

Bo: Brian, I am so excited to talk about this because I feel like we are going to do the world a service right now because this is frankly gross. And I’m so glad that we can draw attention to it and put like a giant flashing beware do not fall into this trap sign on today’s show.

Brian: So without much ado, what trend are we talking about?

Bo: So Klarna, who a lot of you may recognize if you’ve ever gone out to buy something and it says hey okay you want to pay for this thing. How about instead of paying for all of it today like you originally planning on doing, why don’t you spread this out and this $19 purchase you can pay for in the next six months at a fee. Buy now pay later. That’s what you’re talking about. Buy now pay later. So, Klarna, the company that’s notably known for that, has now introduced a debit card that allows people to now make that consumption decision on the spot.

Brian: Now, we had a team member, not to be named, said, “Guys, this slide, this sounds a lot like a credit card, but it’s more sinister than a credit card. Explain why we have issues with this.”

Bo: Yeah. So the way a credit card works is obviously you know you swipe and if you carry a balance month over month you incur an interest charge. An interest charge on credit cards can be greater than 20%. But when it comes to buy now pay later it’s so enticing. It’s that siren song because there are no interest charges. If I buy something for $100 rather than paying $100 today I can just pay $25 each month over the next four months and there is no interest. So the financial mutant in you would naturally think, oh well this is great I have to take advantage of it. Time value of money would suggest that this is something I should be doing, but unfortunately that is not the case.

Brian: But it sounds too good to be true and without a doubt it is. Bo, let’s walk through what are some of the dangers of buy now pay later and then adding a debit card on top of that. This could be a recipe for disaster.

The Dangers of Buy Now Pay Later (2:10)

Bo: Yeah. So some of the dangers, number one is it encourages overspending. The idea and we say this all the time that so often consumers fall into this trap of man I can afford anything at just a hundred bucks a month or I can afford anything so long as I can afford the payment. Well, buy now pay later has become so easy and so convenient that it’s now exacerbated that problem that I can have a thousand different payments every month for stuff that I bought in the past. So it naturally causes us to consume more and more and more.

Brian: And by the way, don’t take our word for the fact that it encourages overspending. There’s actually some stats on this. Look at this. Nearly half of buy now pay later users report at least one financial problem.

Bo: And there are some financial problems specifically related to this. Think about this. 24% of these users say that they overspent. Like 24% of buy now pay later users said, “Hey, I overspent.” How about this? 16% of buy now pay later users missed a payment. You know when buy now pay later falls apart, Brian, it falls apart when you miss a payment. That’s when all the penalties and all the other stuff kicks in. That’s exactly right. And 15% said they regretted a purchase because buy now pay later was a thing that was available to them that was there. It caused them to make a purchase that perhaps they otherwise would not have made. So this is just not encouraging the right behavior.

Brian: So if you ask, we actually pulled the average buy now pay later debt is around $3,800. And that, you know, a lot of people say when you compare that to all the other debts out there, that doesn’t sound so large until you consider this next fact is that the majority of people that are using this are super young people. So if you lay over the fact that this is young people that are running up this type of debt, how are you ever going to get out of the starting gates if you’re already starting behind?

Bo: Yeah, it’s young people and those that are in the most dire financial circumstances that are taking advantage of these. The most vulnerable people are the ones that end up using these services. And we know that 66% of Gen Zers, Gen Z folks that use buy now pay later end up encountering issues, end up having a negative outcome with it. And you know, when you start out on your financial journey, this world is hard enough to navigate just getting out of the starting blocks. And when you allow yourself to fall prey to one of these consumerism traps, it just makes the journey that much harder right from the get-go.

The Consequences (4:42)

Brian: Well, and you think that this isn’t one and done. 60% of buy now pay later users are actually running multiple loans and they’re averaging nine and a half loans per year.

Bo: It’s unbelievable. So that way what ends up happening is that you buy a thing and you have the payment. You buy another thing and you have a payment. You buy another thing, you have a payment. The more you end up trying to take advantage, the further out on the risk spectrum you go to end up falling in a bad spot. And that’s been what some of the fallout has been. According to Fox Business, one in five borrowers, so 20% of folks that are using buy now pay later actually ended up incurring late fees or interest. So this thing that was supposed to be amazing that was supposed to be this awesome tool actually caused the consumption that you were doing to be more expensive anyways.

Brian: Well, and here’s the thing. It’s a death by a thousand paper cuts. If you think about the fact that it’s eroding your long-term potential because check out this stat. 72% of borrowers saw their credit score drop. Now, how do you think, because if we already know this is young people when you go get that first mortgage, I already told you guys the mistakes I made because when you’re getting that first mortgage, it’s not like you’ve had enough credit history that your credit rating is so high that they give you the best and greatest right out of the gates. Typically, I remember I blew up my first mortgage because I did a 10 to 15% discount at a furniture store. Yeah. You got the cash back, but then you have all these inquiries on your credit and other things. This is a problem right as you’re starting out for that purpose.

Key Takeaways on Buy Now Pay Later (6:19)

Brian: And then here’s what I think we ought to close out with some key takeaways. And I’ll start us off, Bo. The big thing I hate about this is that it is a punch in the gut to discipline. That’s right. We tell you all the time that the first ingredient to wealth building is your ability to live on less than you make and exercising and building up that discipline muscle. Well, if you are going to take this consumption trap, because that’s what this is, you’re not even going ahead and working on the muscle. You’re taking the train to easy town or perceived easy town because and that’s what debt and buy now pay later is, a false mirage. That is a gut punch to your discipline muscle and you just can’t fall into that trap.

Bo: Yeah. So, don’t fall into the trap. And then the other thing is when it comes to consuming because we’re not anti-consumption, we’re not anti-spending money, we’re not anti-buying things. But when you do that, we want you to be very intentional. If you want to buy something that costs $500, we want your mind to think through, okay, this is a purchase I actually want to make, and I’m willing to part with $500 of my hard-earned dollars to buy this. Not, oh, I’m going to take the easy way, and I’m just going to pay $100 a month over the next five months. We want you to only spend money on the things that it makes sense for you to spend money on. And if it feels a little painful, that’s okay. That’s the way that it’s supposed to feel, especially early on in your journey.

Brian: And that leads to this point is that I’ve told you guys, especially for young people, you are billionaires of time, which is the most valuable resource. But you are in the beginning at that component where you’re trading your time for wages. And you know that that sacrifice is hopefully so you can build something for the future. And if you understand that value of your billions of seconds of time, you will spend money differently because you are on a clock that is going faster than you realize that it will start working against you. If you don’t turn compounding interest for you, it’s going to be working against you. And that’s why please go to moneyguy.com/resources. Check out our wealth multiplier because this thing, there’s a reason we have koozies and other things that say for a 20 year old who discovers the value of their time every dollar has the potential to become $88 at retirement. But this is a cruel world because at 30 that same dollar has potential to become $23. Still amazing. A 23 times multiple, believe me, 40 year olds are jealous of that with their seven time multiple. People in their 50s and beyond, when you get below $3 or three times multiple, you quickly realize you will spend differently, you will save and invest differently. If you just understand what your time and your money is worth, don’t fall into these innovations that supposedly make your consumption life easier, but really are just a primrose path to destruction and failure.

Bo: I love it. I think I’m so excited that we get to talk about this kind of stuff that we get to share these things. I mean, this is obviously a consumption thing. There are all kinds of traps out there that you need to make sure you’re staying aware of so that you don’t fall into them so that you don’t get derailed off your financial path. And one of the ways we love helping make sure you don’t get derailed is we want to answer your questions. We want to speak to the things that you care about. So, right now we have the team out in the wings collecting your questions. And so if you have something you want to get our take on, want us to weigh in on, make sure you get your question in the chat right now. So with that, creative director Rebie, I’m going to throw it over to you.

The Free Sample Debate (9:59)

Rebie: Yeah, we’re actually going to kick this off with a question to you watching and listening. If you’re in the YouTube live chat right now, you know we just conducted a poll that said, “If you take a free sample at the grocery store, do you feel obligated to buy?” And in case you were wondering, yes, this is based on a real life conversation.

Brian: I see where this thing has already run afoul. We were talking about samples at like ice cream shops at the mall when the guy’s handing out chicken at the mall to try to get you to come in the store, grocery store. We went with the lowest price. You know what? Let’s run it back, another free sample anywhere.

Bo: No. Hey, we’re going to, here’s what we’re going to do. We’re going to, this is going to be a little teaser we’re going to give. I’d like content team, I’d like a new poll. When you receive a free, let’s go mall food court. If you receive a sample, like if you walk to the mall food court and the guy says, “Hey, would you like to try some teriyaki chicken or would you like to try whatever?” and you take that. Have you now engaged in a social contract where you feel obligated to now purchase said good, said food item? We’re going to put that poll out there. We want to get your take and we want to know what the Financial Mutant community thinks about that. And while we’re waiting for the results to flow in, I guess we can answer a question.

Rebie: All right, great. We will go to the first question and then we will come back to this riveting research that we are conducting.

Brian: Why do y’all think they offer these samples, guys? It’s an emotional manipulation. I look I understand there’s, let’s get to the question. Okay, pause. My audience is going to come back with some more research.

Paying Off Student Loans vs. Saving for Engagement Ring (11:45)

Rebie: We’re going to kick it off with a question from Austheboss. It says, “Hi guys, I am 20 years old in college and on step three of the FOO. I am currently paying for school, saving for an engagement ring and honeymoon, and paying on a $3,800 unsubsidized student loan at 5.5%. While I know this doesn’t follow step three, I want to have no debt of mine when I graduate so we can save and invest 25% or more when we are married. Thoughts? P.S. I’m getting my employer match from an internship, which I feel like that’s pretty baller.”

Bo: Yeah, that’s great. Eligible for long-term retirement benefits as an intern is pretty awesome. Well, here’s how I’d like to start my response to this is that money is nothing more than a tool that allows you to accomplish the things that you want to accomplish. You set the goals and then you deploy your dollars to help you achieve those goals. So, what I don’t want to do is sit here and tell you, hey, if you have a goal to be completely debt free, that’s wrong, you should not do that. If that’s one of your goals, then you need to be like, “Okay, hey, that’s my goal.” And if that’s my number one priority, then I would structure my financial life in order to pursue that number one priority. So, when you ask what we think about it, my response to you is we think that your goals for yourself should take precedence and take priority. Now, one of the questions we get asked and one of the conversations we’d want to have is, “All right, what other goals do you have?” Because I just heard, hey, I’m saving for an engagement ring and hey, I’m saving for a honeymoon and I have to get through school and I imagine one of the things you want to do is, you know, get a place together once you’re married and maybe think about home and all of these other things. And so then if the question becomes, okay, I have all of these goals and I’m trying to figure out what’s the most efficient use of my dollars to begin moving towards those goals. I would argue for you with student loans at 5 and a half% in my mind that does not count for a 20-year-old, that does not count as high interest debt. So I would argue that is not a step three thing as it relates to the student loans. In my mind in your situation that’s more of a step nine thing. So I think there are other places your dollars could go that would be a better use with the caveat if being debt free is your top priority then that is your prerogative even if it’s a little bit less efficient than what I would suggest.

Brian: No, I think I wrote down some other notes and I’m going to get into those but I immediately said is he really in step three when somebody who is under 30 years of age has a student loan that’s less than 6%. And I don’t know that I completely agree with that. Now, I think it’s very noble to want to pay off the debt as fast as possible, but you got to triage all the other life things that you got going on because I’ll just go ahead and tell you, I don’t know, I’m old, so maybe things are different now than they were back when I was in school back in the 90s. In the fact that I was dating my now wife of close to 30 years in college and she had to make some hard decisions on where her career was going to go and she was going to have to move and other things and we had been dating for over a year and it wasn’t an ultimatum but I definitely felt the crux of her thing was, what are we doing here? I need to know. Is this thing for real? In my eyes that meant hey, in my triage of life I need to figure out how I can buy an engagement ring and lock down. I mean, you can imagine I don’t know the relationship you have with this and it sounds like it’s serious if you’re thinking about honeymoons and engagement rings, but you say, “Hey, we’re going to maybe this is the modern way, let’s just put off getting married because I’m going to pay off all this debt.” You know, maybe that’s the way it works. I don’t know. But in my eyes, I needed to lock things down in the relationship because in the priority of life, there are certain things I think financial mutants and I already see it in the way you asked this question. Financial mutants and achievers of life are trying to go through life checklist as fast as possible. And I would tell you sometimes you need to slow down and make sure the big decisions are right. You know that spouse decision is a major one. You don’t want to go look at the bitterness of the comments that will probably come up from people who’ve unfortunately made bad decisions and will now share that stuff with anybody who will listen on how marriage is a horrible institution. All these, they got burned and that’s why I measure twice, cut once on that big decision. Measure twice, cut once on where you’re going to live, what you’re going to do for a living. You know, all these things come into play. But I think sometimes achievers are like, “Let’s go. Let’s get married. Let’s go buy the house, let’s go start,” you know, they just boom boom boom boom all this on top when you’re like, whoa, let’s get the life parameter stuff first down and then because this other stuff will start falling into shape much better. And that’s why I think that, you know, evaluate the relationship if that’s the most important thing you need to be doing. There’s nothing wrong with saving up because that’s going to happen all throughout life is you have things that will temporarily cause your attention to focus your next dollar on that and then you quickly get back to trying to build the financial order of operations as fast and efficiently as possible. But life is going to happen. It’s just a fact.

Bo: And dare I say, look, I don’t want to go too easy, but you’re 20 years old. You’re already way ahead of the game just the fact that you’re even analyzing and assessing where I’m at in the financial order of operations as a college student at 20 years old. You’re in a great place. Fantastic. Game’s over. It’s amazing.

Rebie: That is great. Austheboss, thank you for being here. Thank you for your question. We appreciate it. Okay, now back to the free samples. We have some more information to share.

Brian: By the way, I feel like whoever wrote the first sample question, I was not attacking them. I want to make sure we don’t get into a content issue. Totally. But I just saw the question. I just want to clarify.

Rebie: Let me read the new question. It may be valuable even for you to share the results of the old poll and the new poll so we can see…

Brian: I can tell by Bo’s snickering that I’m going to get pummeled and so that’s why probably my reaction was the way it was.

Rebie: Let’s go with the newest question first. It’s if you get a free sample at the mall, do you feel obligated to buy? How many people do you think said no?

Brian: Look at you guys. Heartless.

Rebie: It’s 91% said no. They do not feel obligated to buy. The samples are there for just us to enjoy. It adds to the ambiance of the experience. No social contract entered. How much? Well, I’ll just tell you. At the grocery store, there was a slight difference, but 95% said no. An even higher percentage said no, they do not feel obligated when taking a sample.

Brian: In the content meeting, we were talking about this. I told you guys the reason I don’t do a lot of the grocery store samples is because I think I just have a face where they all just want to just tell me their life story. So, it’s just that there’s a cost also to a social, but it’s interesting. So again, being the true financial mutant that you are, you said nobody ever tries to talk to you.

Rebie: I thought this was wonderful.

Brian: Maybe I’m just old enough that they’re like, “Yeah, this guy’s old enough he’ll want to hear my life stories.”

Bo: But you recognize that you feel, to thine own self be true, you feel that if you take a sample that you are now entering into a social contract where you feel this obligation to buy. So because of that, you actually abstain from the samples at the food court unless you’re going to buy because you know that. So I think that’s at least you’re not saying is hey I just go hog wild and I take all the samples and I just end up buying a bunch of meals. You say no. You say no to the samples. And I think that’s a great example of knowing what your own unique biases are to make sure that you’re being a protector. As funny as this all has been, I do respect that.

Brian: Well, I feel like people are like what do they do with these content meetings? The reason this came up is because I made the statement. It’s a hot take, cold take. I never get these things right. But it was the take that I feel like this falls on all these new modern trends of conveniences, the buy now pay later that’s supposed to make your life easier, the door dashes of the world and all these other things. I think that they’re a trap very similar to samples and other things is that it’s a slippery road when you start doing, I know that those things don’t all, they’re not congruent and they don’t all fit into the puzzle but the point that’s what this came up and then you guys when I made the point that this falls under the same kind of umbrella as samples you’re like oh you had this until samples, that’s how this all came about. Yeah, we don’t see that but I do, that’s why I don’t door dash, I don’t do any of that stuff. Now, I’ve bought, you know, because look, if you have somebody in the hospital, you know, and you’re at the hospital and you want to give a gift card so somebody can have meals brought in. That’s a completely different thing. But for like I’ve been where she doesn’t cut my hair anymore, but I had a person who was cutting my hair and they were door dashing in like steaks from this nice restaurant down the street and I was like, “What are they doing?” You know, I was just like, “What in the world are we doing here?” It just I don’t know. But you know what we are doing for you guys? We are sampling great financial content. That’s what this is every single Tuesday at 10 a.m.

Bo: So if you feel like Brian that you’ve entered a social contract where you ought to offer some renumeration for all of this free content, would you please subscribe? That’s all the payment that we ask. Well, that’s all that we want is for you to subscribe so that we know you are out there. Look at that tie in.

Brian: Yeah. But I will, I’m honest. Part of the reason we want you to take all of our free stuff, our free samples is because when you become so successful and your life gets complicated beyond the simple decisions of you know living on less than you make and basic things like I do want you to come back. I mean even the design of this I want you to give us a shot. Remember who planted the seeds of knowledge. Come back to us and fulfill the abundance cycle. See it all is interconnected in how we design this thing.

Bo: I love it. moneyguy.com. Click on become a client if you want to do that.

Using Down Payment vs. Investing for FIRE (22:08)

Rebie: Okay, we do have some more financial questions to get to. So, we’re going to go to John B next. It says, “Hey, money team. My wife and I, both 29 and on step seven of the FOO.” Wow. “Have $100K saved for a down payment.” Nice. “If we use it all, we would be under 25% on housing. If we used $50k, that would put us right at 25% of their gross income being spent on housing. Would you invest the difference or put it towards the down payment for cash flow flexibility? We have $450k invested between Roth, pre-tax, and brokerage. And we’re looking to do FIRE, which is financial independence or next endeavor around 55. Thanks.”

Bo: So, John B, this is a great question. I don’t know if you’re new here. So this answer, if you are new here, you may not have heard this yet. But if you’ve been here for a while, you’ve probably heard this one. It starts with a D. It starts with a D. It depends. It depends very much on your unique circumstances. Now, I love that you laid some stuff out for us. Hey, we’re 29. We have $450,000 saved up and we have a desire to be part of the financial independence next endeavor movement. We want to have options in life sooner than we might have them otherwise. Well, that gives me some hints. That gives me some clues about how to think about this. But I think a lot of people are faced with this problem. I could put more money down on the mortgage and that’s going to cause my payment to be less. Or I could put less money down. It’s going to cause my payment to be more, and then I can deploy those dollars elsewhere. I think what you have to do in order to decide what is the optimal decision for you is you have to begin with the end in mind. Have you gone through the exercise of doing something like knowing your number? And if you don’t know what that means or you have no context there, you can go to learn.moneyguy.com and check out the know your number course where basically you define okay if we know we want to be part of the FIRE movement and let’s say that our number is one and a half million by the time we hit 45. Making that up, but let’s say that’s our number. Okay, based on where we are today and based on our current savings rate, would it be necessary for us to take that $50,000 and deploy that to move towards that ultimate financial independence goal or are we already going to be on track to do that? And if we just get our mortgage payment lower and we’re able to save the difference, are we still going to be on track? So, you have to do a few derivatives of the calculation to determine what’s the best use of those dollars given your unique specific goals.

Brian: I love this because this proves the point. You know, the whole purpose of step seven. There’s a reason when I was writing Millionaire Mission, I considered this the most improved chapter and I was really proud of it afterwards because I think I finally stuck the landing on really the heart of what’s going on at step seven. You just kind of laid it out in your own way too, Bo, is that begin with the end in mind. Step seven is when you have hit hyper accumulation meaning you are saving and investing 25% towards the future but now instead of it just being all tax motivated and optimizing from that standpoint you’re thinking about man how will I actually use this money in the long term and you’ve given us enough breadcrumbs because you have two things that are in conflict with each other right now is that you have a large down payment that can go towards the mortgage, it’s great that you saved up that much money you have extra cash reserves there. But what’s in conflict is how big your mortgage is versus this FIRE goal of the next endeavor of retire, having financial independence at an early age. Those things are somewhat in conflict. And that’s perfectly fine, by the way, because that’s what I love because step seven flows right into step eight, which is abundance goals. And part of the reason we wrote with the FOO abundance goals or prepaid future expenses is that once you get to 25% and you’re fulfilling because you did the exercises in step seven, you can spend and save that money however you see fit. That’s why it’s the first stop where you can if you want a nicer car, you want to get into funding the kids college, you want to get into residential rental property, you know, Bob’s your uncle. Do what you want because it’s the opportunity to go that direction. So I think you’re in the perfect place in steps seven and eight. Do the homework though. That’s why you are in step seven of the fact that you got to find out are you ahead of the curve, behind the curve. You’re definitely ahead of the curve, but the problem you have to worry about is that you’re ahead of the curve with a very ambitious goal. So that changes the mathematics of 25% in a lot of cases. If you think you’re leaving the workforce at age 50, it might require you to save 30, 35%. You just got to do the math on that before we can say, “Yeah, go use those resources on the house.” Now, if you do the math and you say, “You’re so far ahead of the curve.” If you choose because it makes you sleep better and it’s just more fulfilling to pay down or put down a bigger house down payment so you have less of a mortgage, knock it out. I mean, that’s the thing. I’ve had so many content creators that they do the Dave stuff where they just become debt crusaders and they tell me they prepaid, they paid off their house when they were 32 years old. And I always say, “Hey, look, before I pick on you about, you know, not understand difference between making wealth versus maintaining wealth, you know, when you’re in the make wealth phase of your life.” Is that were you already doing 25% towards like your work retirement and your Roth IRA? Oh, yeah. I was doing, I was like well I’m never going to pick on somebody who has done the hard work of getting 25%. What you do from there, it’s not wrong because that’s part of the it depends and you have to know yourself and what brings you value. What I get upset about is when people do things like do a huge mortgage down payment and they never even thought about hey do I need to be funding a Roth IRA? Do I need to be, you’re not skipping those steps. It’s just you need to make sure you fulfill that step completely and I think you’ll be in a great place.

Bo: I just want to add one little small caveat and I’m certain that you’ve already thought about this. I want to make sure the $100,000 you have saved for the down payment is a separate compartmentalized bucket of money because what I don’t want you to do is if you do decide, hey, I am going to put this in the mortgage to get my mortgage payment down, you can’t take your emergency fund down to the quick because when it comes to buying a house, there are other costs that are going to be associated with that. So, a lot of home buyers want to get the down payment as high as they can, not recognizing that that liquidity, that cash you have post home purchase is incredibly valuable. So, I’m hoping the $100,000 is above and beyond your fully funded emergency fund. And if that’s the case, I think you have the flexibility to make the decision accordingly.

Rebie: That’s great. John B, thank you for the question. I hope that helps you think through this exciting financial decision.

When to Switch from Budgeting to Cash Management (28:59)

Rebie: Mike D has a question for you guys. My wife and I are on step seven of the FOO and have used a zero-based budget for our 10 years of marriage. What triggers do you consider to determine when it’s time to switch from budget to a cash management plan?

Bo: Brian, I hear you talk about this all the time because this is one of the things I think you even wrote a little bit about it in millionaire mission. Do you remember there being like a moment in time when it happened? You’re like, “All right, it’s Tuesday. I’m budgeting. Oh, today’s Wednesday. I’m cash flow managing.”

Brian: No, I think it’s an evolution. I mean, there’s a lot of things that evolve in your life financially is that like I was a tightwad. Now I’m not a tightwad. I mean, I think budgeting versus cash management plan, it’s more about you’ve got to put in the reps because I don’t want to make this sound too easy. You have to put in the reps of knowing where your money is going first before you get the easy way out of saying cash management. Cash management is the muscle memory and the dividend of being a well-worn path of discipline in the past. So if you do budgeting and you get to a point where automatic for the people you’re saving and investing what you need to reach your goals, it seems to me because I’ve seen it in relationships, it’s crazy for you to hyperfocus on where every dollar goes to your spouse. It creates some weird dynamics in the relationship and other things. But that doesn’t mean you get to skip the budgeting because you don’t want to have the conflict of where your money went. I’m just saying there should be a reward for good discipline and a life well-lived that you eventually graduate to the next phase of the evolution. So that’s how it happened for me is that if you find out that you’ve had continued success, you know that step seven’s the perfect place because that’s where you’re actually doing the exercise of thinking not only how am I saving and investing in a tax favored way, but I’m thinking about how am I actually going to use this money when it comes to retirement. And if you’ve done that homework and you realize, hey, we’re going to be set if we just set these autopilot, you know, make the good habits as easy as possible and the bad habits that much harder. If you’re already doing that stuff naturally, if you hyperfocus on the details, on the focus on the minors, you might be creating more dynamics, it’s really the hassle factor gets to a point that it creates weird things in your relationships.

Bo: Yeah, I think it’s a function really of muscle memory. I’m not a great golfer. I’m not even really a very good golfer, but I’ve played with some great golfers and it’s wild. A really good golfer can go out there, grab a club, and when they swing, it’s just going to be pure contact and the ball is going to fly great. They don’t have to think about it. It’s just part of the muscle memory. They’ve done it so many times, they just have it down. I think that budgeting versus cash flow management is kind of the same way. I don’t have to think about how much is going categorically in each bucket. Like, if I were to ask you, Brian, do you know what you spent eating out last month? or do you know what you spend at the grocery store? No, it’s just it’s not something that I’m able to track and put my wrap my head around anymore where there was a point in time in my life where I could have told you to the dollar, hey, this is how much was on groceries and this is how much was. Once you kind of get past the fact of knowing, okay, I know that I’m not overspending. I know that I’m funding all of the savings vehicles in the way that I’m supposed to be funding them, it does not matter if, you know, my eating out budget was $100 this month and it’s $200 next month. That becomes inconsequential relative to the financial plan that I have in place. Once you start to recognize that you have that level of muscle memory developed around the way that you spend and consume, I think that’s the indication that you’re now ready to move on to a cash management plan.

Brian: Yeah, I mean it should be a reward. Do the work and be rewarded for the hard work. By the way, Mike D, License to Ill was a very formative album for me. So, thank you for that.

Bo: It was wild. I could not, I was thinking Mike D. I was like he’s going to mention the Beastie Boys. He’s going to and he and I was like oh my gosh he didn’t but he saved it till the end. You hung on to that one.

Rebie: Well Mike D truly thank you for being here. Thank you for your question.

Spending More Than 25% on Housing When Ahead on Retirement (34:16)

Rebie: Emoney has a question. Would being ahead on retirement ever justify spending more than 25% of your gross income on housing? We are 28, but we have three times our annual income in retirement already. How would you think about this?

Brian: But you wouldn’t. Yeah, you just put down more money. That’s a great, I mean because it’s not, I mean if you do you realize because part of this when we create rules and things you realize your biggest risk with success is that your spending gets to be so big and so far from the social safety net that when you retire your money just doesn’t go as far as you thought it would. And so I have no problem with people live the baller life but just make sure you’re not faking it. I mean, because it’s so much better to be rich than to look rich. And if I see that all of a sudden your housing is more than 25% of your income and you didn’t make that up with a much larger down payment, it just it feels like you’re faking it until you make it.

Bo: Yeah. I think the language you use is, hey, I’m ahead of the curve. Was that the language? Well, he’s ahead on retirement. I’m like winning the race. In my opinion, the best way to screw up having a lead is kind of when you start showboating, right? Like when you start showboating in the race, that’s a really good way there. If you’re already ahead of the curve and you’re doing all the things that you’re supposed to be doing and you’re making the financial decisions that a financial mutant would need to make to have three times their annual income saved up by the age of 28, I would argue, why do you need to make the decision to go run afoul of the housing rule and go buy a house that’s 30% of your gross income or 35% of your gross income? Because what if something changes? What if there’s a reduction in force with one of your employees? Or what if something happens income-wise? or what if you want to make the decision to have a single income if you’re a dual income household. By making that aggressive decision, what you’re doing is you’re moving yourself further out on the risk spectrum for no reason. So, I love that advice. Hey, if you want that bigger, nicer, more expensive house, just save up for a bigger down payment so that you can put enough down to get your mortgage, your housing costs inside of that 25%. I just don’t see a reason to stretch that.

Brian: Well, I think and there’s an analogy here. You know, one of the things if you’re looking for hobbies, people who get into private aviation, they usually buy themselves out of their hobby. And I think that successful people can buy themselves out of a comfortable retirement. And what I mean by that is like people get into private aviation, they buy a Cessna. They can afford the Cessna. They can afford the insurance on the Cessna. They can afford the burn rate of the fuel. Then they move into the Cirrus, a little bit more price point, but then all of a sudden they’re getting into different brands that just the cost is more, the burn of the fuel is more, the insurance is more, and then you can’t even get in private jets when you’re getting into $5,000 an hour burn rate on, you know, on just the fuel. I mean, it’s things. This is what I see wealthy people do, too. And this is why there is something valuable. Have you noticed the wealthier people get, the poorer sometimes they look? Go look at Rolexes and other things. You’ve quickly realized that a lot of people who buy these brands that the unwealthy perceive as great, people who are wealthy just don’t care about this stuff anymore. Now, there are we live in a community where it’s just like I was telling Bo, I couldn’t believe the price point of a brand new neighborhood by a it’s not even a custom home builder. It’s a semicustom builder. And I was like, so there are people either these people are in debt up to their eyes or there are enough people concentrating in this area that they can afford to pay those millions of dollars. But that’s a choice. And that’s why I think that it needs to be a choice that you truly can afford, not that you’re leveraging up to your eyeballs. So you take away your flexibility, you take away your options and all the benefits of actually being a disciplined financial mutant who let your money create more time and resources for you to do what you want, when you want, how you want with your money versus being indebted to that commitment just because you want to impress people who probably don’t even care.

Rebie: I love that. Look at you guys being such a good check and balance because there is an undercurrent.

Bo: Like clearly he’s a good saver. Maybe he has a big shovel. Like he could do a bigger down payment. It’s looking like the harder path, easier path was just have a bigger monthly payment. The harder path is a bigger down payment. That’s the better path, right?

Rebie: No, good stuff. Thank you, Emoney, for the question. I hope that helps. I hope that gives you some good food for thought.

Roth IRA vs. 529 for Med School (39:02)

Rebie: All right. Walker K has a question next. It says, “My wife is planning to start med school in about 3 years. We’re debating whether it’s better to focus on contributing to a Roth IRA or a 529 right now considering flexibility and tax benefits. Any suggestions or thoughts?”

Bo: I don’t know. I don’t know enough because I don’t know the state tax benefits. I don’t know how old you are. I don’t know what your other savings has looked like. Right. because I don’t know what other options you have to fund to fund med school. Is this going to be something you guys are going to cash flow? Are you going to have to borrow money from this? Do you need to be able to save up in the 529 to a certain extent to be able to afford it over the next couple years? There’s just a lot of unknowns. And I do not consider those to be equivalent things. And this is what I mean. Saving in a Roth IRA, it’s a step five type issue. It’s a saving for your future self, building towards financial independence. It’s a retirement type savings. Saving for med school, even for yourself, is like a prepaid future expense. It’s an expense you’re going to incur at some point in the future. Now, this is different than college for your kids because it’s so near dated. So, it’s really a cash flow item. And so, the decision that you’re going to have to make between which one of those to fund is less about, okay, which accounts are more attractive and what are the tax benefits. It’s more about which one of the accounts more aligns with the goals that we’re trying to achieve. It’s not comparing apples to apples, you know, one account to another account. It’s comparing, hey, does it make more sense for us to put money towards our future self or does it make more sense to put money towards an expense that we’re going to have in the near term? And that’s something where you’d have to know more about your overall financial situation to determine which of those would be the most efficient ways to tackle that.

Brian: Here’s the way to handle because I love how this dovetails perfectly into what you’re saying. Since this is a cash flow and just knowing where the future of your life is going, I look at this is a perfect opportunity to put on your 3D glasses because when you get into big life decisions, when we talk about 3D glasses, we’re talking about if you’re trying to start a business, if you’re thinking about sending, you know, going to medical school and probably running up multi, you know, six figures of student loan debt and beyond. These are all big choices that in the next 1 to 5 years will impact your life a great deal. So, you ought to at least go into this with your eyes fully open. So, here’s what I mean when I say put on your 3D glasses. I want you to create three plans. You’re going to have your dream plan. This is like your wife goes to medical school. Y’all are able through lifestyle discipline keep the borrowing cost as low as possible. She sticks the landing on not only getting a great city for the residency, but then when she gets out and gets into practice, she just crushes because she is, you know, it’s in the city y’all want to live in. It’s making more money than you ever thought. That’s the dream. Now, I want you to do the down to earth. Put in a few things where maybe, you know, it’s going to be harder. You have to take on more debt than you figured for. You know, cost of living is more than you anticipated. Put in some roadblocks in there, but put in some wins as well. And then don’t skip the third and most important part of the 3D glasses. Put in the doodoo plan. This is like, oh my gosh, it just goes bad. You know, you run up debt, the job markets aren’t as good, you don’t get into the market, you don’t, you know, she doesn’t have as much opportunity as you’d hoped. Are you going to survive? And is it going to work out? And this is the reason this is so important is it’s so much easier to focus on the doodoo plan on paper than it is to actually live it.

Bo: To live it. That’s right.

Brian: Because that’s what you know, everybody has a plan till they get punched in the nose, you know. And that’s the thing is that I want you to at least have the plan so you can go ahead and numb yourself to what how bad things could be so you can at least not be in that shock phase when things don’t go perfect. And you know, I think there’s a lot of life decisions I’ve made where the 3D glasses has saved me. And I know I hate giving homework, answering a question with an intensive homework project, but man, this is your life and this is a big decision that it requires the extra work to make sure you stick the landing.

Rebie: It’s great. Great. Well, Walker K, we really appreciate you being here and for asking the question.

Using an Inherited Roth IRA as Emergency Fund (43:29)

Rebie: Next question is from JL421. I inherited a Roth IRA with no RMDs and eight years left to empty it. It’s invested and covers about 14 months of expenses for him. Would that fulfill an emergency fund?

Brian: No.

Rebie: And allow me to move on to steps five plus.

Brian: No, because it’s access to cash. It’s not actually cash. No. I’m sorry. Next question.

Bo: Yeah, that’s just I can say what an emergency fund actually because he technically has the 14 month the money’s there but I would argue if the reason I’m going slow here is because there’s a lot of decisions. RMD rules have changed a lot over the past couple years and the way that you have to navigate inherited assets is a little bit different but one of the best types of assets to get to inherit are Roth IRAs because yes, there is this 10-year window in which you must deplete the account, but you know what that means? You get to let those dollars continue to grow tax-free for the next 10 years or in this case for the next eight years. So, if all you did was, okay, well, I’ve got 14 months of expenses in there. I’m just going to liquidate that and that’s going to be cash in that Roth. You’re like, you’re absolutely neutering how powerful that Roth IRA could be. I would argue no, you want those dollars invested. If you’re really thinking about if you’re at the stage in your financial journey where you don’t just focus on asset allocation, how you spread out your assets, but also asset location, what types of investments you own and which type of accounts inside that inherited Roth IRA might be a great place to hold like high growth assets, S&P 500 index, international index, those kinds of things that have a lot of growth potential because then you’re going to maximize that tax-free benefit if you’re putting it even in like cash or conservative holdings so that you can access it for an emergency fund, you’re just taking the teeth out of what that account can do for you. So, I do not think it should be considered short-term money by any stretch.

Brian: But cash, you know, emergency reserves is such a valuable part of your financial life that it is two steps to the financial order of operations. It is highest deductible covered step one and emergency reserve step four. So you have this money that’s come to you. You now need to figure out how much money do I need to have if I was respecting the financial order of operations in emergency reserves. And then here’s the next question you need to ask yourself because you really don’t want to touch the Roth. I mean Bo is spot on. This is powerful. But if worse comes to worse and you have no more access to any other money, maybe that’s a place you go and free up some cash to go ahead and fill up the emergency reserves. But if you do the exercise of saying how much do I need? And then ask yourself this next question. Here’s the pivotal question. Is there some because I know how valuable this Roth is, is there some discipline step I can take right now that if I triage this that I can fix this over the next three to six months and then do it. Now if you ask yourself that question and you’re like no there’s no way it would take me two years to get my emergency reserves. Then I think you have to make a hard decision and you have to probably take a portion of this inherited money to shore yourself up. You ought to be so mad at yourself that you couldn’t do this through side hustles or discipline that you use this to be a motivation point to figure out how you fix this for the future because you left some on the table. There’s a reason when I talk about my Roth follies, you can sense that I turn that $10,000 I missed out on when I lay out the opportunity cost of the hundreds of thousands of dollars that it could have become. You’ll see that that hurts and that creates a motivation to do things better and be more efficient. I want you to kind of feel that same thing. JL421 is that this money can immediately be your fix, but that shouldn’t be the first thing you do. You ought to first ask yourself, could I fix this myself so I can build these emergency reserves up maybe over the next three months? And if that’s the case, then I get the best of both worlds. That’s right. And I get to keep my Roth money and have this legacy. Whoever I inherited this money from, they have to be just so pleased that the legacy going forward is going to be this tax-free growth, this leg up, this opportunity. But then if you also honor that by being super disciplined yourself or maybe taking on working a little bit extra to get some extra dollars by working harder, taking on an extra shift or something like that, then I think that that also can be a part of your solution.

Rebie: Great answer. JL421, thank you for being here.

7.37% Mortgage and Emergency Fund Priorities (50:09)

Rebie: All right, we do have some more good questions in here. So, let’s go to Mitch M. Oh, Mitch. Mitch. He says, “Hi, guys. I’m 24 with a $172K mortgage at 7.37%. Where would you place this in the FOO? Only other debt is my car at 2.9% and I’m saving 25% in my 401(k) and Roth IRA. I’m also currently working on my emergency fund. Thanks.” So, lots going on for Mitch. What do you think?

Bo: I was ready to answer the first question. A bit of a ping pong in the FOO talk about…

Brian: Go ahead and tell him because we have mortgages. You notice when we talk about high interest, low, mortgages are unique. Bo, share how we think mortgages are unique.

Bo: Well, here’s a really interesting thing, Mitch. I don’t know when you bought your house, but you have a prevailing interest rate of 7.37%. You bought it at the worst time. Well, the rates have actually come down a little bit right now. Like, we’re seeing right now we have clients that are buying first-time home purchasers buying and it’s like 6 and a half%. So, there has been some reprieve from these rates. And so one of the things I would encourage you to think on is okay, maybe this isn’t high interest debt. This mortgage debt might not be high interest, especially for a 24-year-old because there are going to be two options you’re likely going to have at some point in the very near future if interest rates continue to decrease. If they continue to move in a downward trajectory, then there’s a really good chance you could refinance this mortgage potentially. And if you refinance the mortgage, even if you keep your payment the same, so you’re paying it down on the same schedule, but the interest rate goes down, you’re going to apply more towards principal, and it’s going to be a win-win where you’re going to have less interest cost. You have the same cash flow. It’s a wonderful thing to be able to do. But there’s actually a second thing, and this one might be even more exciting to you. One of the things, and it may be a little early yet, again, depends on when you bought this, is a lot of people don’t realize, one of the things you can ask your mortgage company to do is, hey, is there an opportunity for me to have a rate adjustment? Is there an opportunity, a modification, a rate modification, a rate modification where rather than doing a true traditional refinance, I’m going to pay a couple hundred bucks. There’s not the same underwriting, not the same closing cost, and I can get my rate modified from 7.37 down to like 6 and a half. Again, that’s not a 2% mortgage, but it’s moving it in the right direction. And because you have these options with mortgages that are possible to you in my mind, for a 24 year old, I don’t think that applying excess capital towards the mortgage is likely the most efficient mechanism. I think your dollars could likely be used better going in a different direction.

Brian: So Mitch, without a doubt, go out there and see if you can rate modify, do a mortgage modification. Call the lender. If they don’t do it, they’re potentially, by the way, I have to amend what I said. I said he bought at the worst time. At the worst time for mortgage rates. That 7.4% is probably one of the worst I have seen. Yep. So I would definitely take your advice, call and see if there’s a rate modification since rates potentially are, you know, a percent lower than where they were when he purchased. If that’s not, go and price out and see where you are with refinancing to see what the options and the cost of that are. And then, but here’s the thing. I’m going to give you a little more grace than Bo did. You said something really key. You said you were already beyond 25% with your Roth IRA, with the 401(k). To my eyes, that puts you in step eight slash even going towards step nine. If you’re the type of person that peace of mind wise, you want to throw a little bit extra on the mortgage, I’m not going to fight you on that because you are in that phase because you’ve already done the hard work of saving and investing 25% and doing the Roth, doing the employer. You ready for this?

Bo: Yeah.

Brian: You ready for? Can you bring the question back up for me real quick, team? He put a little nugget right there at the end, and I was like, I wonder if you’re going to see it.

Bo: Uh oh. Whoa. I didn’t see that. Mitch, you buried the lead. Currently working on emergency fund. There it is. That’s step four.

Brian: That’s foolish. That’s step four. That’s foolish, which is foolish because you’ve got to have emergency funds. So, goodness gracious.

Bo: Yeah. First thing you need to do is get an emergency fund. So, that’s why I would not prioritize paying off on the mortgage. I did not see that. I’m over here writing rate modification 7.4, you had emergency fund after the emergency fund maybe. Think about that.

Brian: Yeah, he put that he knew it too because you put that at the very end.

Bo: Well, because I think he even said he’s doing his Roth, he said only there’s 2.9, I’m saving 25% in 401(k) and Roth. If you’re doing that before an emergency fund, you’re already out of whack. Like emergency fund, you got to do that before you go to Roth, before you go to anything other than employer match and 401(k). You’re just you’re living too far out on the risk spectrum needlessly. And you know what? When you swim when you swim naked and the tide goes out, you know what I mean?

Brian: That’s right.

Bo: His question was like this journey through the FOO and I didn’t know where we were going to land and it was like, oh, we’re landing on emergency fund. You can’t skip that. But, we’re glad you asked the question. I failed elementary, you know, reading comprehension there. I didn’t catch that last sentence.

Brian: There’s a lot of good other information about the mortgage. That was already that was always my least favorite part of test taking is like they would they, oh, yeah. They bury like the one important thing right there at the end, but you like get so excited. I don’t know. I don’t know if you know this. I’m super excitable. I got really excited about the first part of the question. I’d always miss. No, I used to in math classes if you could give me like I used to love doing the speed drills on multiplication tables, but then you get to the math problem where they and it’s so cruel how they do it. They give you like this three paragraphs with all these details and then they’re not it’s not one question from that. They’ll ask you five questions off of this thing that you have to read. And I’m like, I don’t want to do this. That’s why I went into accounting where they do the exact same thing to you. So, I didn’t learn.

Bo: If only they’d give them, you know, what’s 12 times 2? 15 times 15. I mean, life would be so much easier. So much easier.

Helping a Parent Who Is Afraid to Spend in Retirement (56:25)

Rebie: All right. Let’s do another question. Okay. From Unpopular Advocate. I have a father who is retired with a multiple seven-figure net worth outside of his fully paid off house, but he still lives entirely off of social security. How can I help him be less afraid of spending?

Bo: Well, and I want to be I want to be clear here. One of the things that you need to verify, unpopular, is the reason your father only lives off of social security because he’s afraid of spending otherwise? Because I think a lot of times we’ll see people who are in a fantastic financial position and have the ability and propensity to increase their lifestyle and we think to ourselves, oh my goodness, no, no, no. Yeah, why don’t you need to buy the nicer house or you need to drive the nicer car, you need to go on the fancier vacations? And what we need to recognize is often times that is us imposing our biases on someone else. If your father says, “Hey, you know what? I got a pretty simple lifestyle. I live off social security. It covers all my bills. I do all the stuff that I want to do.” Then that’s okay. Now, if it is something because he has fear around not being able to pull money because he thinks he’s going to run out, well then I think some education and some stress testing and actually putting together a plan that shows where the guard rails are could be valuable. But encouraging non-spenders to start spending just because they can spend a lot of time is just causing someone to fight against their nature.

Brian: I’m going to give you an angle that I think sometimes when first of all you have a conflict of interest because since you’re a child you have to be careful because they might feel that you’re offering this as a way to take them on vacation or do something, loosen up the purse strings for grandkids education. I don’t know but you have to be careful that your good intention might be perceived in a different way. That’s why I would give you advice. If you’ve ever talked to a parent, you’ve talked to anybody who’s been married for multiple decades and you ask them, “Hey, have you ever gone and gotten counseling?” And they’re like, “Yeah, it’s amazing how you can say the same thing, but when your spouse or your children hear it from a third party, it took root. It took root versus when you said the exact same thing, it came off and it just went in one ear and out the other.” This is one I at first find out the why. If this is more about there is fear there that could still be you need somebody that could you know be an advocate on both sides to know if it’s not fear and you still think that but maybe they just need more organization there’s some benefits. That’s what I love about my job as a financial adviser is if you guys have I mean I think Suze Orman has done good but one of the bad things I think she did in the 90s is that she gave this perception that financial advisers because she’d have her speed drill where it’d be like I want to go on vacation, no. I want to buy a new house, no. I want to get a new car, no. I mean she could have just cut out the speed drill altogether because mostly I mean I’ll just say 97% of the advice was no and so that’s what I think a lot of people have the perception that you hire a financial adviser and they’re going to basically gut your decisions to say the default no. I’m the exact opposite. I’m constantly trying to give you the balance of why you ought to maximize every moment and every decade of your life. And I think that sometimes that can be an advocate and it might be beneficial to come from a third party so that way everybody feels represented and you don’t have to put yourself in the uncomfortable thing because money unfortunately when it comes to family I’ve seen some ugly stuff and that’s why you always have to be very careful. It’s a slippery slope in marriages. It’s a slippery slope in kids and adults, I mean adult children and their parents. It might be beneficial since you’ve only done this once to bring somebody who’s done this hundreds if not thousands of times to make sure you minimize all the relationship carnage that could potentially happen.

Rebie: Great. Great. Well, unpopular advocate, thank you for being here and thank you for the question.

Closing Thoughts (1:00:45)

Rebie: We love answering your questions every Tuesday at 10 a.m. Central right here on YouTube. And remember to go to moneyguy.com because we have tons of free stuff there for you. Calculators, downloads, including our archive of all of our episodes on tons of different topics. So moneyguy.com, be sure to go check it out. We made it for you so that when the cameras turn off, you can keep thinking about personal finance, continuing to build that confidence so you can focus on what really matters because that’s what it’s all about.

Brian: That’s exactly what it’s about. True wealth is the freedom to focus on what matters to you. So, make sure you’re going out there, check out all that free stuff that we talked about, take advantage of the resources. I’m your host, Brian Preston. Mr. Bo Hanson, Money Guy Team. Oh, and Rebie, Money Guy Team out.