Mindy: Welcome everybody to the Bigger Pockets Money podcast where we are interviewing Andrew Giancola today and talking about the stairway to wealth. The order of operations for your money. Hello, hello, hello. My name is Mindy Jensen and with me, as always, is my breakfast table date co-host, Scott Trench.
Scott: Thanks, Mindy. It’s great to be here. And with that, I’m going to let you continue on with this introduction.
Mindy: Scott and I had breakfast this morning. It was delightful and he was still able to come up with a pun. Of course.
Scott: I have some great skillet this Mindy. I skillet. I had a breakfast skillet.
Mindy: I had quesadillas. I don’t know how to say, uh, I can’t yeah, no, I’m not fast like that. So you come up with one, Scott.
Scott: You can’t come up with cheesy breakfast puns the way I can.
Mindy: Oh my goodness. Oh, I quit. I quit. You just do it all. Just kidding, I’m going to do mine still. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe that financial freedom is attainable for everyone, no matter when or where you’re starting.
Scott: That’s right, whether you want to retire early and travel the world or go on to make big time investments in assets like real estate, start your own business, or if you just want a financial plan that can help guide you on a correct course to financial independence and long-term wealth, we’ll help you reach your financial goals and get money out of the way, so you can launch yourself towards those dreams.
Mindy: Scott, I’m going to raise a toast to your breakfast puns.
Scott: Oh, nice.
Mindy: I didn’t come up with that myself, though, I do have to give credit where credit is due and that was from our producer, Kaylin, who is just as quick as Scott is. I am still way, way, way slow.
Scott: Thanks a brunch. That was she’s just that was her message right now. That was fantastic.
Mindy: Oh my goodness. I can’t even there’s all these puns. All right, it’s now time for the money moment where we share a money hack tip or trick with you, our listeners. Today’s money moment is, throw almost spoiled food in the freezer. Have those bananas seen better days, chuck em in the freezer until you’re ready to make banana bread. Put that fruit or veggie in a smoothie or save it for a stir fry or some soup broth. This cuts down on waste and your grocery budget. Do you have a money tip for us? Email money moment at BiggerPockets.com.
Mindy: Andrew Giancola is the host of the Personal Finance Podcast, a top 40 investing podcast. And he’s also the founder of mastermoney.co. Andrew, welcome to the Bigger Pockets Money Podcast. I’m so excited to talk to you today.
Guest: Thank you guys so much for having me. I am really excited to be here.
Mindy: Andrew, for people who haven’t heard about you or your podcast, can you tell our audience a little bit about yourself and how you became interested in personal finance?
Guest: Sure. So, uh, my name is Andrew Giancola, I’m the host of the Personal Finance Podcast and it’s a podcast that we started in 2020 trying to teach people how to build wealth. And, uh, we started that podcast off, um, and just my mom and, you know, a couple of friends were listening at the beginning and then we kind of grew it over time. Um, and are really, really passionate about teaching people how to build wealth. And my background is actually in, uh, finance and I worked in finance for a long time and then built out some businesses and escaped the, uh, the rat race and 9 to five, um, and started working on some of those businesses and then building out some of those as well. So, have a long, uh, history of doing a bunch of different things, but the podcast is one of the main things we focus on now.
Mindy: Today we’d like to touch on your stairway to wealth, not stairway to heaven, stairway to wealth, which is a framework you created to build wealth. How did you create this order of operations?
Guest: So when I was starting to get my money right, when I had my first job in finance, believe it or not, I made $30,000 a year. So really quickly early on, uh, I was living paycheck to paycheck. I was not good with money very early and so I had to figure out a system that would allow me to actually learn how to build wealth. And I remember a moment in time, uh, when I went to go fill up my tank of gas, I think I was 22 years old and I didn’t have enough money to actually fill up my tank of gas. I had an old Chevy suburban. It took like 40 gallons of gas and I remember how frustrated and mad I was at that point in time. So I vowed that I would figure out a way to actually get my money together and put together a step by step system, uh, that would allow me to do so. So what I did was I researched a bunch of different personal finance experts that were out there, um, one of which was obviously Dave Ramsey, Ramit Sethi, a bunch of other folks and they had all these different systems that uh, I thought would work for my life. So I started to implement, uh, some of those systems and take pieces of each one and then put them all together and the stairway to wealth is actually what came together after doing all that.
Scott: Andrew, why don’t you go through and tell us what the, uh, the the nine steps you’ve got here are, um, uh, in the order of operations for them.
Guest: The nine steps to the stairway to wealth is first we lay the foundation. So the foundation is budgeting, automating your money, that type of thing. Then step one is the cash buffer. So having some money to protect yourself against life as you go through this process. Then step two is to get your employer match. Step three is to pay off high interest debt, any debt above 6% interest rate. Step four is getting your emergency fund in place. So having six months, uh, having six months of your income with your emergency fund. Then step five is your Roth 401k, Roth IRA or HSA level. Then step six, we have max out pre retirement accounts or invest in real estate. Step seven is your wealth accelerators. Step eight is future expenses like saving for kids’ college, those types of things. And then step nine is paying off low interest debt.
Mindy: I want to jump in here and ask the question about the cash buffer because while I like Dave Ramsey’s first three baby steps, I don’t like the $1,000 emergency fund that he suggests. I think it should be more and it’s better than nothing, but it’s real easy to spend $1,000 or way more on an emergency. So what sort of cash buffer are we talking about here?
Guest: So the big thing that we wanted to shift was that Dave’s number just never changed. So it never ever changes. It’s always been $1,000. Obviously that that amount of money is not worth the same amount as it has been, uh, in the past. So the biggest thing we wanted to change is look at first the average emergency fund and what it is. And the average emergency is usually around $2,400. But I do like the idea of, like if you know Bryan Preston and Bo from the Money Guy Show, they have a system where they put into place where you save up enough for your highest deductible. And I really like that idea because what that does is it protects you against anything in life where you can utilize your insurances and figure out what the highest deductible is. So one way that we look at that is we go through and say, hey, what is your auto insurance deductible? What is your home insurance deductible? What is your medical insurance deductible, whichever one’s the highest, just save that amount. So at least you can get coverage, um, on some of those deductibles and protect yourself as you’re proceeding through some of these steps.
Scott: I I think this is a great topic and there’s no right answer to this this cash buffer, you know, question. I think, you know, I I’m not necessarily saying I agree one way or the other, but if I think if Dave Ramsey were here, he would say, well, the reason it’s $1,000 is because even if you have emergency that that’s $2,400 or your smallest your highest deductible, I’m sorry, um, is a theoretical emergency and you have emergency right now, most likely if you’re in this situation and starting with his baby step one, your step one here, um, you might as well just start paying off your emergency debt. So what what would be your answer to that uh that response from our fictitious Dave Ramsey impersonation that I’m doing.
Guest: Yeah, I think that is one uh great consideration because high interest debt is obviously a huge wealth killer, which we’ll get to here in a second. Uh, but one big thing is that I think when emergencies come up, a lot of folks if you look at a lot of the data, when emergencies come up, that is what puts them even further backwards than they already are. And there’s a number of different situations where that can happen. Um, but I just think life is going to happen to you. It’s not when, it’s not if it’s going to happen to you, it’s actually when is it going to happen to you. And you have to be prepared for that and at least have enough to to protect yourself against that and then you can start attacking that.
Scott: Well, again, you diverge here. So with step two, um, you what walk us through what step two is and why you choose to do something other than pay down high interest debt, um, next.
Guest: Sure. So step two is to get your employer match. Now, if your employer does not offer an employer match, then obviously you can skip on to the next step. Uh, but when it comes to your employer match, this is a 100% rate of return on your money. This is a really, really powerful thing. Uh, and so it’s so incredibly important to make sure you get that. Now, if you’ve never heard of an employer match, all this is is that when you open up a 401k plan at your employer or TSP or whatever else, they will end up matching a percentage if they offer this this actual premium uh thing that they offer here. So, for example, if uh you put in 3% of your 401k, they will match 3%. It just depends on what the actual plan has available to you. And so to show how powerful this can actually be, if you take an example of someone who makes $100,000 per year and they got a 3% employer match, you do a 3% match and they do a 3% match every single year and you got an 8% rate of return on that match over the course of 30 years. It’s amazing what can happen and how powerful this can be. So just on that 3% match, you would have $704,000 over the course of 30 years at an 8% rate of return if you just got that match. If you got a 4% match it’s $938,000 at a 5% match it’s $1.1 million. And I have friends who have 6% matches and did the math form it’s $1.4 million that you’d have in that account if you got that 8% 8% rate of return. So it’s an incredibly powerful thing to take advantage of because it is free money and I love free money. I don’t know about you you Mindy and Scott, if you guys love free money, but that is the way that I kind of think about this and try to take advantage of this.
Mindy: Um, I love free money and if anybody doesn’t, you can email uh me for my uh address and I’ll share that with you. You can send me all the free money that you don’t want.
Guest: And then next, we’re going to talk about high interest debt. And high interest debt is making sure that you pay down that high interest debt. So you can think of like things like credit cards, personal loans, all of those different types of things because those are wealth killers. So we want to get rid of that high interest debt uh as fast as we possibly can.
Scott: Awesome. So we we have 6% as this cut off between high and low interest, um, coming into step number three here. Um, why why 6%? Why are we cutting it off there? and is that going to change if interest rates remain high in your view?
Guest: So for me, it will not change much of interest rates remain high. We really started out at 5% and adjusted it to 6% because the rate of return on average for the market is somewhere between 7 to 10% and I think 7% is kind of the conservative approach that you can look at this for. Um, and so the reason why we’re looking at doing that is because of that reason. I think your dollars are more productive in the market than they are paying off that low interest debt below a 6% interest rate. But it is very difficult right now at the time that we’re in, at the time we’re recording this, interest rates are rising above seven, some are even above 8% when people are getting mortgages right now. So it is a very difficult situation where you have to think through that. Uh but I think even specifically for mortgage debt, that is something that you can consider when rates go down and we have no idea when they would go down, but if they do go down, then you can kind of refinance out of those uh and go from 8% down to a lower interest rate.
Scott: Awesome. And do you recommend fully paying off every penny of high interest rate debt before moving on to step four or So it’s every debt that’s above 6% interest, you pay down 100% before moving on to step four in your nine step program here.
Guest: Exactly. So that’s kind of the thought process that we have specifically as they get higher because for most people, this high interest debt level is going to fall into things like credit card debt or personal loans. And if you look at the numbers on things like personal loans now, they are rising rapidly, which I was very surprised looking up the numbers. The average person has $12 to $14,000 in personal loans now. So a lot of this high interest debt is going to fall into the credit card or personal loan category.
Scott: Well, walk us through step four here then. Um, what’s the emergency fund and how much should I how how much should I save up and and why that amount?
Guest: Sure. So the emergency fund is one of the most powerful things that you can do to protect your money as you start to build wealth. And like we said with the cash buffer, it is not if an emergency is going to happen, but when will an emergency happen? So you have to have an emergency fund in place to protect yourself. And there’s a number of different ways that you can do this, but my favorite way is to put it into a high yield savings account because that’s just going to keep your money there, uh, with somewhat of a higher, higher interest rate, it’s going to keep it safe. Um, and when it comes to how much emergency fund you should have, I truly believe that you should have six months in your emergency fund for most financial situations. Uh, and the reason why I think about that is your emergency fund is in place for emergencies. One of the biggest reasons it’s there for is to protect you against job loss. So if you think of the process of losing your job, what’s going to happen is you’re going to have one to two months where you are going out and applying for jobs, maybe you have another two months where you’re going through interviews and then finally, uh, you figure out, you know, which job you’re going to land on. So six months kind of gives you that runway and allows you to be able to protect yourself from job loss. But it’s also for a number of other things. If your car breaks down, if you have issues with your house, it also allows you to invest in rental properties because as you guys, as you both know, investing in rental properties, you have to have some cash reserves available there, uh, before you start doing something like that. And it’s also protection against things that you don’t like in life. For example, if you have a brand new boss and you absolutely hate that boss and they’re taking away some of your mental health and all these different things, then it’s going to allow you to protect against that as well. So there’s a lot of really cool stuff that’s available in the emergency fund, um, that’s going to allow you to at least kind of protect yourself against life. So I like six months. We started to say three to six months, but three months for most people seemed like they were still getting into sticky financial situations with that three months time frame. So I love at least having six months. And then if you’re self-employed, I like to haven’t even longer runway, 9 months to a year.
Mindy: Okay, I love the six months. I really get the heebie jeebies when I hear uh the other guy, Dave Ramsey, say three to six months because I think a lot of people who are in the position that they need this kind of help here, three months. And they’re like, oh gosh, I don’t know if I can ever get to three months. I barely get to three months and then I stop saving. They don’t get to three months and then maybe start working on the next one while continuing to save to six months. So I love that you’re suggesting six months to start with. How does step four and step one work together? So, step one is create a cash buffer safety net, which you alluded to was the uh, largest deductible or, you know, some some uh, amount like that. And then step four is six months of uh, expenses. How are those are like, do you still have your largest deductible in addition to the six months of expenses or are you just adding on to that?
Guest: That’s a great question. So this is something where you have two options here. One of which, you can keep that largest deductible thing for things like your car breaking down, uh, your house having issues, any of those types of emergencies, you can keep it available there if you want to. And or you can roll it into to start your emergency fund. Emergency funds are really hard for a lot of people to save up for because it’s, uh, you know, thousands and thousands and thousands of dollars you have to have saved up to protect your income. So you can roll it into your emergency fund as well and just have your emergency fund as your cash buffer as you build that out. And or, if you make a high enough income, you can have both available. One is protecting you against things like, you know, small things that happen in life and the other one is protecting you against job loss or having a sabbatical or whatever else you want to do with that money. So you have two options there depending on your situation.
Mindy: I like to be as conservative as possible, especially for people who are just starting to fix their finances. They’ve never paid attention before or they’ve, you know, discovered that they’re in a big hole and they want to start paying attention now. I it can seem really daunting to have all of this money just sitting there, it’s doing nothing, I say in air quotes, but it’s not doing nothing. It is waiting for an emergency. So, how much fun is it to get hit with, you know, four flat tires or whatever and then be like, oh gosh, how am I going to pay for this? As opposed to, hey, that’s what that emergency fund was for. So, I would say suggest, you know, have them both. do step one and like you don’t do all of this in one day. You don’t just like knock step one through nine out all in one day or all in one week. This is a long process, but it’s better than starting from zero or starting from the negative, like when you finished with step nine or step one or step two or like wherever you are, you’re you’re still in a better position than you were when you start paying attention. So it’s every day is more progress.
Scott: Andrew, who who’s the target of these these nine steps? Who who who are you writing them for?
Guest: So originally, I wrote them for myself. This was a system I kind of put into place for me as a young professional who’s trying to figure out how to get their money together. And so for most people, that is what this is for is for people trying to figure out how to get their money together. They want the step by step guide for this. But if you are, you know, a few steps in advance already, you can jump right in and figure out, hey, well what investing order do I need, which we’ll talk about, I’m sure soon. and you can just use the investing order if you want to do it that way. If you already have your emergency fund, you don’t have any high interest debt, uh, you can just dump jump into that step. So it just depends on what stage you are in life. But for a lot of folks, they want that step by step guide to figure out, you know, exactly what they need to do, uh, because they’re trying to figure it out, you know, they get TikToks all day long or they’re seeing things on social media and they’re just trying to, you know, get through the weeds here. Um, and so that’s what we kind of created this for. It was I used it in my own life, it worked really, really well. Uh, and then I was able to kind of, you know, teach other people the same exact system I used.
Scott: Awesome. So you, you know, and I think that’s important to call out here. Um, this, this system, it does not seem is written for or, you know, or, or built for the totally broke person who has proven that they’re totally irresponsible with money for many years and needs a hard reset, which is what Dave Ramsey’s program is for, right? Dave Ramsey is for folks that have, uh, completely, you know, uh, uh, you know, been it botched it with their personal finances and he’s all about that. Whatever your plan was, wasn’t working, you should start again with my plan here. And I think in the context of his first three baby steps, which are $1,000, save $1,000, um, uh, pay off all debt except your home mortgage, and then build a three month to six month emergency reserve. Well, you can get away with three month emergency reserve if, you know, um, you you’ve paid off all of your debts, right? Including your low interest rate ones because that’s that, you know, you don’t need quite as much of an emergency reserve in your order, you’re doing one that’s for somebody a little bit more savvy, wants to wants to get a little bit more returns there maybe, um, you know, hasn’t made a a long history of mistakes and so can can can responsibly have, continue to maintain some debt on their balance sheet, I think. And so that, in that case, you need more of a uh, um, uh uh an emergency reserve in that particular case. Um, you know, and then and then I think from a super aggressive person as well, someone who is willing to go all out and pursue financial independence, which may be many listeners are bigger pockets’ money, for example, um, you’re saving 50 plus percent of your income, your after tax take home pay, then I think again, some of the rules begin to change for you, um, or the guidelines, you can you can afford to be much more aggressive when you’re saving that high of a percentage of your income paradoxically, because you’re so conservative with your household budget. So would you would you agree with that from a just a philosophic for philosophizing high level viewpoint.
Guest: I absolutely would agree because as you, as you stated, you really do have to be responsible with that low interest debt if you’re going to go about and doing these steps. And for a lot of people and a lot of people in my audience as well, and I was very interested in this. I was very interested in financial independence. So you can kind of tailor this into financial independence by hitting all these steps each and every single year and you can see as we get to some of these later steps, you have to have a higher income to hit all of these steps in a row. So, um, that’s kind of how we tailored it as well was to make sure that these are people who, you know, can actually manage that low interest debt and be able to kind of go step by step and follow the steps and stay disciplined.
Scott: Well, okay, so with that, we’ve got our six month emergency reserve built. What’s what’s coming next and why why, uh, why are we investing there?
Guest: Sure. So the next step is the Roth IRA and the HSA. So this could be Roth 401k, Roth IRA or HSA. So it’s just the Roth level there. Um, and the way that we look at this is you can do either or, you can do both, um, but you have a couple of options here. So for the Roth IRA, I absolutely love Roth accounts for two reasons. The tax free growth and then being able to pull the money out tax free. So you can tribute money directly from your paycheck. It’s already been taxed out of your paycheck. the money grows tax free and you can pull the money out tax free. So if you do this over the course of 30 years and say for example, you maxed out your Roth IRA at $6,500 per year, then what happens here is you have little over a million dollars, $1.1 million in that account over 30 years and $800,000 of that is going to be the growth. And so this is completely tax free money, $800,000 of tax free money. There’s not many places that you can do something like that with the Roth IRA. And then the HSA is probably one of my favorite accounts that are out there. I call it the super retirement account, but the HSA has a couple of different caveats. So it stands for health savings account and you contribute money tax free, you can invest the money inside the HSA and it can grow tax free and you can pull the money out tax free as long as you have a qualified medical expense. And that is a major caveat. Now the IRS has a huge list of qualified medical expenses that you can reimburse yourself for. I just save my receipts and then uh I put them in a Dropbox and then I just keep a spreadsheet of how much I’ve had available. and what you do with the HSA is if you don’t use the money for qualified medical expense by the time you turn age 65, it just turns into virtually a IRA essentially. Um and so that’s the cool thing about the HSA, but it has those triple tax benefits if you have those qualified medical expenses. Now the the other caveat with the HSA is you have to have a high deductible health plan. So if you don’t have a high deductible health plan, you don’t qualify for the HSA, which is why we have both the Roth and the HSA at this level.
Mindy: If you have both accounts, which one do you recommend maxing out first? If you’re available, if you have the Roth IRA available to you.
Guest: So if you have both available to you, and even if you make too much for the Roth IRA, I love the backdoor Roth IRA as well. But if you have both available, I personally uh will contribute to the Roth first then go to the HSA and the only reason I do that is because I shift from a high deductible health plan to uh to a regular health plan a lot of different times. So I can’t max it out every single year, like specifically, you know, in the years where my wife is pregnant, for example, we know we’re going to have a lot of different hospital bills, then that’s when I will make those shifts. But for the most part, I go Roth because I know I’ll be able to at least max out that Roth every single year, then I go back to the HSA. So that’s just the way I think about it, but a lot of people would actually reverse that because of those triple tax benefits.
Scott: Well, one thing to call out with the HSA as you alluded to here, uh and again just to reinforce and hammer the point home is the HSA compatible health care plans by definition have very high deductibles and very high out of pocket maximums. So they’re often a a essentially a worse health care plan than the ones that are not HSA compatible and so that a lot of reasonable people will will switch back between them back and forth between them just like you said. It’s probably a better financial decision to skip the HSA and in a year you know you’re likely to have high medical bills for example, you think there’s a high probability, move to the low deductible low out of pocket max plan and forego the HSA benefits that year.
Guest: Exactly. That’s one of the biggest keys with the HSA is that you have to kind of be flexible with how you’re handling those plans, specifically if like you said, if you if you have high medical bills that year, that’s a big key there.
Scott: Okay, so now after all of this, we’re on step six here and we’re into the 401k or real estate investing, you have a divergence here. So how do you how do you think about that divergence? Why, what what what’s the, what walk us through this step and why there’s a divergence and what routes you took personally.
Guest: Absolutely. So for me specifically, uh one of the biggest things here was that when we started to talk about this, we had the 401k at this level and we had real estate at actually the next level, but what I realized very quickly was I didn’t actually take that path. I did the 401k and real estate at the same time. Now I did not when I didn’t make a lot of money, I did not max out my 401k at that time, but I would invest in my 401k and I would invest in real estate both at the same time. And so this was something where when we went through this process, um I realized very quickly that you can accelerate your path to wealth if you put real estate investing at this level. Now, the the thought process of having that at the level is you have that emergency fund already in place, you have some retirement accounts that are building up if you have a Roth or an HSA there and now you have real estate available to you and or if you don’t have any interest whatsoever, which real estate’s obviously not for everybody and if you don’t have interest in real estate, then you can go the 401k route. So those are two options there that are available or whatever your pre tax account is uh, that you have.
Mindy: Okay, step seven is wealth accelerators. So I would like to hear what you have to say about that and how that differs from step six, specifically the real estate investing part.
Guest: Sure. So the real estate investing part on that front for wealth accelerators is for a lot of people if you want to do things like flips for example or maybe some bigger deals, uh that’s where we have wealth accelerators here. But in addition, uh when it comes to, you know, when it comes to real estate, the other side of this is that I’ve gotten really interested in things like boring businesses. So things like automatic car washes or laundromats or all those different things um are really, really cool stuff that you could be investing in. And I think it can really accelerate your path to wealth, but you have to have some of these other things covered ahead of it before you actually start investing in that kind of stuff. So that’s where we kind of think through the wealth accelerators and then bigger real estate deals and or flips um or another thing that we have here as well in the wealth accelerator.
Mindy: So, what do you mean by real estate investing in step six when step seven is like the larger deals and flips?
Guest: So the way I did it in step six was learning how to invest in real estate. So I would invest in single family, small multi family, um those types of properties early on in in step six and that’s how I personally did it. Now I think you could scale up to much larger deals in step six as well if you know what you’re doing, you know how to run the numbers, you understand how to invest in real estate. I think it depends on your knowledge level and where you are, but at the same time, I think you could do it in either or, but if you want to scale up to those much larger deals and you have not done that yet, then the wealth accelerators level is where I would consider doing something like that.
Mindy: Okay, I like that you have these so far down the the list of your nine steps. You’re in the the last third of the nine steps here. Um and I am going to take a moment to plug this little website called biggerpockets.com. If you want to start investing in real estate, you absolutely need to be educated in the process. Sure, anybody can buy a house, but you and you can make money in real estate. I know I’ve done it, Scott’s done it, Andrew’s done it, but you can also lose a lot of money in real estate if you don’t know what you’re doing. So, if you want to get more information about it, you want to learn about real estate investing, learn how to do it the right way, go to biggerpockets.com/forums. Okay, end of rant. Now, uh, this show is sponsored by biggerpockets.com. Uh, let’s talk about, we did step seven, step eight, future expenses. And why is this all the way down in step eight and not before? So what do you categorize as future expenses? And why is that almost at the bottom?
Guest: So for future expenses, this is a big one that a lot of people do too early. And for me, we talk about the oxygen mask method, which other people have talked about as well. But what that means is like when an airplane is going down, you take care of your own auction mask first, and then you help somebody else along the way. And this is the same thought process that you have to take with your money. You have to take care of your retirement and your wealth building first, then you can help take care of others. So with these future expenses, these are things like saving for your kids’ college, a 529 plan, or however else you want to save for your kids’ college. Along these same lines is saving up for wedding expenses for your kids and those types of future expenses. If you have a sinking fund or something along those lines for that, and then investing for your children. This is a topic we talk about all the time on our podcast is investing for your kids and I think it is one of the most powerful things you can do for your kids, but doing it too early when you’re not saving for your own retirement can be a detriment to your financial situation. And then lastly is just saving, you know, extra funds for your retirement, like having extra cash on hand or longer emergency funds, those types of things are all the the future expenses that we’re talking about here. So, this is something where it’s very difficult to not put your children before you because that’s what you do in everything else in life. But at the same time, you got to take care of your own retirement first, then you can take care of everyone else.
Mindy: One really awesome uh quip that I have heard about that is you can always finance your kids’ college. You can’t finance your retirement.
Guest: Exactly. And that’s kind of the thought process along this whole thing because at least there is always student loans available and obviously, if you are interested in finance or personal finance or fire, all these different things, we do not want to, you know, have our kids taking on loans, but sometimes in a lot of situations, that is what’s available to you, but there is no loan for your retirement, so it is so powerful to make sure that you take care of your retirement first.
Mindy: Okay, and can you do future expenses? Can you start that in tandem with any of the other steps or would you recommend waiting until you’ve got to your your uh pre tax or real estate step six and your wealth accelerators and step seven?
Guest: So, I think if you have your retirement goals and you’re hitting those retirement goals. So say for example, you look at your retirement number and figure out that it’s 25x your expenses. Say you need $80,000 per year and you multiply that by 25 and you have $2 million available there. If you’re hitting and on track for those goals by the time you want to retire, then I think it’s okay to start saving for those future expenses. Maybe you have no interest in wealth accelerators, you just want to save in your retirement accounts or in the market and then you want to move on to saving for your kids and helping your kids out. A lot of people are in that situation and so that’s where I think you can save at the same time in tandem. If the step does not apply to your specific situation, you can always skip it and go to the next step.
Scott: I think that’s an important point to drill into, you know, here. And again, you know, talking about, you know, because there’s nine steps here, it’s people will naturally compare it to Dave Ramsey’s baby steps. You know, we start with the three to six month emergency reserve in step three, and then the step four is invest 15% of your household income into retirement. People don’t have to agree with that, but it’s very clear where the breakdown is, right? Once you’ve started investing 15% of your household income into retirement, have your three to six month emergency reserve, now I’m going on to step five. I think that’s that’s, I I think a great question that Mindy was asking there and I’d love to drill another layer of depth in. When, okay, I I’ve maxed out my Roth and HSA, that’s super clear. Steps one through five, knows exactly where the cut off is. Where is that cut off between real estate investing and wealth accelerators for for example, though? Um, is it like, you know, hey, I’m going to is it step six is get to your retirement number at 4% rule with your pre tax IRA contributions. Make sure you’re on track for that, then go to real estate investing for a certain amount. that’s six and a half and then seven is wealth accelerators or how do you break that down? How do you, how do you advise people on that?
Guest: That’s a great question. So that is one big differentiator that we’ve had uh in the past. When we did this the first time, we had that question come in all over the place and that was a big differentiator. So you have to figure out what your end goal is, uh, before you start this. So, if your goal, for example, is to have a tandem and a and a flexible thing between investing in retirement accounts and real estate investing, you have to do two calculations here. A, you have to figure out how much cash flow you want to have with your real estate investing for that freedom number for say it’s 50 50. For 50% of your income that you need, you need to figure out how many properties you need to have available to you to actually cover that 50% of your expenses and your goal, whatever your goal is in retirement. And then the other 50% the target needs to be hit for that 25X expenses in your Roth IRA and maybe you have to trickle some into your 401k as well in order to be able to invest enough to hit that number. So that’s kind of how we think about both of those is making sure that you know your goals ahead of time and then having those trickle in as you go through that process.
Scott: a- Okay, so there’s a so after step five, when we’ve maxed out our Roth and and or HSA, or as we approach that, more precisely, there needs to be a precision of goal setting or a precision of planning that we go through that really narrows in exactly what we want that end state portfolio to look like that we’re going to try to back into, is that right?
Guest: Exactly. So you have to have those numbers nailed down so that if you’re going to do both, if you’re going to do a hybrid method as what we call it, um, if you’re going to do both of those things, you need to know what the goals are for each one and just understand the math. The math is very easy, but it’s just understanding the math and learning how it works is going to be the the the best thing that you can do going forward.
Scott: Awesome. And then that informs how much to contribute to my 401k, how much to contribute to my real estate down payment fund, how much to contribute to starting a small business or buying a small business, uh, those types of things. How much to contribute to college or wedding funds, all that kind of stuff, uh, and then when to cut the investing and begin paying off the low interest debt, which is your last step.
Guest: Exactly. And I know how difficult it can be to save for multiple savings goals, especially if you only make a certain amount of money. So putting together this plan and having this in place and then kind of mapping out those goals is going to be one of the best things that you can do. It’s one of my favorite things that I did early on because once you start to see this to work, it’s really, really powerful to watch that compound.
Scott: Awesome. So let me let me pose a hypothetical here. We’ve got a $60,000 per year income earner, ambitious to get their finances in order, a couple, you know, not a crazy bad financial situation, uh, and we’re starting to go through through this. So we save up the cash buffer. Um, and by the way, the expenses are, let’s call it $4,000 a month. So $48,000 a year. They’ve got about $5 or $6,000 to play with on top of that. Um, so we save up the emergency reserve in the first couple of months. Um, we take the match, um, and that’s 4% of their paycheck. So that’s, uh, what what is that? 4 times it’s about $2,400 bucks there, but it’s pre-tax. I still have another couple thousand to play around with. I pay off my high interest debt, that takes me about 18 to 24 months to to pay off on my high interest debt. And now I’ve got this emergency fund. But the problem is that, uh, after I max out my Roth and or HSA, I have no additional cash left over with which to pursue the other step the the the other wealth building avenues here of buying a house or house hacking or real estate investing or contributing more to my 401k or trying my hand at a small business. And I’m ambitious to do those things. How would you advise that person proceed? Um, you know, assuming that they’re already optimized on the income front.
Guest: So if they are already optimized on the income front, you’re saying they can’t increase their income anymore. Um, that would be the first step that I would look at. If they can’t increase their income anymore, that’s what I did because I was in this exact situation where I was going through and maxing out, you know, everything that I could. I went to my Roth and I went to, you know, my HSA and doing those two things, and then beyond that, when I wasn’t making much money, then I looked on the income side to try to increase my income. That’s the biggest thing that you can do in that front. But if you are really, really interested in something like real estate investing for example, and say all you have per year is to to be able to invest a certain amount and you’re getting, you know, your max on your Roth IRA for example, and you have maybe just a little bit left over, but you are really, you know, gung ho on real estate investing. I have no issue with somebody, you know, allocating more dollars towards real estate investing if they know what they’re doing and understand that because I do really truly think that you can accelerate your path to financial independence through real estate investing, which we’ve seen so many different examples obviously on this show, obviously Bigger Pockets as well where you’ve seen people be able to really accelerate their path to, to financial independence through real estate investing. So I have no issue with that. Uh but I think the number one thing is is to increase your income so that you can allocate more dollars towards that through side hustles and a bunch of other other options that you have available.
Scott: Awesome. Yeah, I I just think that’s a challenge that from a practical sense, folks have when they’re confronted with lists, you know, or the these step by step uh uh approaches to to to building wealth. They’re they they are right answers. Yours is a a right answer here uh to that. And then, but then I think it’s great to hear that even you’re acknowledging, hey, my rules, you should break them if you really want to get into real estate and begin contributing there more more heavily in there. And I think that’s the big challenge is there’s a sacrifice that has to be made here at some point if you want to get ahead in the wealth building journey. I love how your first instinct is a right answer is work harder. Get more earn earn another source of income. Figure out how to how to increase your income. Um because that that that solves a bunch of these problems and now you can go down the ladder here of, you know, taking a match, then the maxing out the 401k, HSA, Roth IRA, and then and and have some surplus to left over in real estate. But the consequence of that uh what’s implied there underneath is the grind, right? There’s a a multi-year grind if you want to actually go through all of these steps uh, uh maxing them all out and then getting in into uh uh and having enough left over to to begin actually pursuing these other wealth builders.
Guest: Exactly. And you’re spot on on that because that is one of the things that’s actually baked into this. Now, the beautiful thing about this is I’m really flexible once you get to the investing zone. So I’m not really flexible if you’re not going to pay your high interest debt off or any of that. I don’t think you can skip any of those steps when it comes to paying off your credit cards or anything like that. But outside of that, once you get to the investing zone, there may be someone who’s a super high earner and it makes more sense for them. See, their CPA tells them, Hey, you need to uh contribute to your 401k first before you go to the Roth IRA because, you know, we need to get some of these uh pre tax benefits here. So there are situations like that where it is flexible once you get to this investing zone, especially if you are really proficient in one area, say for example like real estate investing. You’re an amazing real estate investor, then that may be the best path for your dollars to go is towards real estate investing instead of putting it into the market. So I love to have the hybrid approach, that’s what I did. uh but it may not be for every single person. And so once you get to this investing area, uh you can be flexible on that front.
Scott: Yeah, I I completely agree. I think there’s one right answer or one set of principles that involve bare bones cash emergency reserve or safety net or thousand dollar whatever it is, right? We could debate the number whether it’s a thousand or smallest deductible or the 2,400 or whatever. Then it’s crush your high interest rate debt, um or bad debt. I love taking a match from your employer. I think that’s right. um, um and and uh uh and not talked about enough here. And then building out some sort of semblance of an emergency reserve and then from there the options explode um, to, you know, and and and there that’s where a prioritization has to take place that’s congruent with your goals. And you know, you could I think the Roth HSA is is a a a perfect one from there. But then after that, I think you’re right though. Like who knows what the right answer is there. Is it the wedding fund? Is it the real estate? Is it the wealth accelerators? Um and that. And so it it seems like there’s like these steps six through nine are a set of guidelines, that a starting suggestion, but feel free to break them and and and go after the one that’s most important or relevant to your goals there.
Guest: Exactly. I think that’s why it’s so important to to kind of look at it that way and have that flexibility available is because each situation is very, very different and it’s just going to change for each person on what the optimal way to go is.
Mindy: Like I said earlier, this isn’t all in one day that you’re doing steps one through five. So I think by the time you get to step six, you’re more comfortable with your money. You have a more fundamental understanding of how it works, your risk tolerance, what you want, like I mean, I can see this taking years to get to step six. You know, two, three years to get comfortable to this step six period. Um, especially if you’re just starting out, you’re making $30,000 a year. I was making 24 when I started out um and thought I was just rich, and you know, but at $24,000 a year, you can’t max any of these things out and still be able to eat. So, um, you know, getting comfortable with all of this, then you start thinking about your pre tax, your real estate investing, your wealth accelerators. I mean, I wasn’t thinking about wealth wealth accelerators until I don’t know, five years ago, 10 years ago and even then I was like, I mean outside of real estate which I don’t you’ve got it on step six and I’ve just, I’m thinking of wealth accelerators as businesses, but I see how that could be real estate too. Um but yeah, like once you get to this point, then you’re you’re more able to diverge from the path and take this as more of a guideline than a, you know, set in stone rule.
Guest: And you’re spot on on that because the big thing with this is this is the long game. This is how you have to think about this is throughout your financial life. It took me 10 years just to get to the wealth accelerator level uh where I was doing all of these things and at that wealth accelerator level. So that I think is really, really important distinction is to make sure you understand this is just a long game. This is something that it takes time to build wealth and so this is where you really need to land, contrary to what things on social media or whatever else talks about, they say it happens in two or three years, but really it does take a long time and you really have to build up to some of this stuff.
Scott: I I love that. I completely agree, right? you know, it’s taken me 10 years to get to, you know, the point of of thinking about those types of things as well. What do you say to all of the people all the content, all of the hype that’s going on around skipping steps one through five here and going straight to the buying a business when you have no money, no income, no credit, uh, and those types of things. Like what would you say to to somebody who’s who’s seeing that, um, really interested in it and and a little, you know, um, and and and excited about that. Once doesn’t want to to spend the next four years going through steps one through five.
Guest: I can see how people can be enticed by something like that, but the biggest thing is your risk level, your personal finance risk will increase significantly when you do something like that. So if you get into something without having say cash reserves, for example, and anything goes wrong, then you are having a huge financial detriment and you’re going backwards 10, 15 steps even from what we’re talking about here, if you have some catastrophic financial event. we’ve been talking about Dave Ramsey’s baby steps the whole time. This happened to him in his 20s where he was overleveraged when it came to real estate. He talks about this all the time. and he had to claw his way out out of bankruptcy and all these different things because he skipped all these steps. uh and then that’s where he started the baby steps as well was because of that reason. So there’s a bunch of different examples of people and for most people, there’s there’s not a lot of uh actual real examples out there. I think I’ve seen a lot of people looks like they’re lying to be honest. Um so I think realistically, I think it’s going to take you more time over that time frame than what most people say.
Scott: I think I I think that I would completely agree with you and I’d say, we are here in BiggerPockets Money and you are the host of the personal finance podcast because the right answer is to spend several years fixing your financial foundation and building it to a strong position and then make highly leveraged investments into things like real estate investing, your first home, or a business, a small business, for example.
Guest: And one thing I could say is if you are, say for example, you’re really anxious to get started building a business or real estate investing, one key that you can do over this time frame, as you’re starting these steps is learning how to do it during that time. That’s one of the most powerful things that you can invest in your time into is that knowledge. I remember when before I started real estate investing, I listened to the BiggerPockets podcast, I listened to every single episode for three straight years. Uh, I went through all the forums. I was always on there all the time. And so I bought every book, everything. And so I spent so many years just learning and understanding it so that once I started, at least I had that baseline knowledge. Obviously, there’s a lot of things that happened in real estate investing where you have to learn by doing, but I had that based nine knowledge and it’s saw so many different examples of mistakes that people made just by listening to some of those episodes where it allowed me to actually have, you know, just more more savvy when it came to to investing. So I think that’s one of the most powerful things you can do as you start to go through some of these steps.
Scott: Love that. I think that’s great. Wel, obviously a big fan of BiggerPockets here as well. Uh I think that’s a great use of time with it. and I also want to point out that combined combined with that knowledge and that investment you made in your self education, you also had a margin of safety with your reserve six month emergency reserve after completing steps one through five here.
Mindy: That’s why you have the reserves in the first place. All these people who say, you know, I don’t have any, oh, my banker is demanding that I have six months reserves. Yeah, you want to know why they want you to have that? Because they know that you don’t have any experience and they have experience. You can either be learn from somebody else’s mistakes or you can be the mistake that somebody else learns from.
Guest: Exactly. And you’ve nailed it because that’s what, that’s a quote Warren Buffett had I read a long time ago. I remember he said, you know, you can make or you can learn from most people mistakes, something along those lines. and so I’ve always taken that to heart and kind of listened and trying to learn from other people’s mistakes so I don’t make those same exact mistakes.
Mindy: There’s a lot of the same mistakes that are being made over and over again in real estate and if you back to the BiggerPockets forums, biggerpockets.com/forums, if you go in there and you read, people will, you know, oh, my sister wants to rent from me. Should I rent to my sister? Here’s a 1000 people saying, don’t rent to friends or family. Do you know why they’re saying that? Because they rented to friends or family and it was a mistake. Trust me, it’s a mistake. It’s always a mistake. Don’t rent to friends or family. You think it’s going to be different for you, it’s not 100% of the time. I can guarantee you it’s going to end in a disaster and a ruined relationship. Just make life easy and learn from somebody else’s mistake.
Guest: Exactly. And even I remember listening to podcasts, for example, with my first rental property and my first tenant that I had in there, they said, hey, listen, uh I don’t have enough money for the security deposit or my last month’s rent. But I remember reading through every single book and listening to the podcast and how many things could happen if you actually went through that process. So just even little things like that uh will help protect you and your finances by learning all that stuff. So it’s really, really important, uh to have that knowledge ahead of time, especially with things like real estate, buying boring businesses, all that kind of stuff.
Scott: We really appreciate this discussion, Andrew. Thank you for sharing the awesome uh uh uh steps that you have here for building wealth. We really appreciate it and where can people find out more about you?
Guest: Sure. So you can uh check me out on the personal Finance Podcast, whatever your favorite podcast player is. And if you want a a PDF version of this, we have it at mastermoney.co/stairway to wealth where you can see it visually if that’s if you’re more of a a visual person when it comes to some of these steps or you just want to hold on to those and so you can remember what steps go in what order. Uh, and we thank you guys so much for having me. This was a really fun conversation.
Mindy: This was a lot of fun. Thank you, Andrew, and we will talk to you soon.
Scott: All right. That was Andrew. You know, Scott, I like his uh, stairway to wealth because it’s nine steps, it’s not six and he’s not telling you to save up a nominal amount. I really, really, really love that step number one is create a cash buffer that is not an emergency reserve, it’s just to get you started. I love his thoughts on that. It’s not $1,000. I really don’t like the $1,000 emergency reserve that Dave Ramsey suggests. I really like his lowest uh deductible or every the average American emergency is $2,400. Start there, but that’s just a start. If having that much money doesn’t make you feel comfortable, increase it before you start on step two with it which is the match for your employer. What did you think of his nine step process, Scott?
Scott: Yeah, I I’m always immediately, you know, kind of questioning of a of a of a process for for wealth building, right? Um, you know, everyone the it’s got to be predicated on who it’s for and I’m glad he knows exactly who it’s for, right? This kind of uh professional who wants to achieve financial independence but isn’t in a complete mess, um, you know, uh, uh, starting from zero or whatever with that. So I think that’s really important because there’s no one right answer to building wealth, it depends on your goals and I love how he also acknowledges that once he gets past the, you know, uh the initial hurdles there of emergency reserve and a financial strong financial foundation, the options begin to multiply and there’s lots of right answers and the divergence between steps really depends on your financial goals. So I I think that it’s a wonderful system for folks who are willing to invest more time for example in studying this and be a little bit more aggressive than for example, Dave Ramsey’s baby steps, uh and who know that they’re going to have to make their own choices. They can’t just surrender themselves to the system and the order of operations uh like you can with Dave baby steps, you have to actually think and have a plan and specific goals about where you wanted to go afterwards. And so I think that’s a really powerful um approach there. But I also think it’s really telling that, you know, I I have yet to really come across folks who broadly disagree with the, hey, get your financial house in order. Save get pay off all your high interest rate debt, build an emergency reserve and then invest. Don’t skip ahead to the, you know, uh, try to try to make a gazillion dollars overnight with some crazy investment thing here. It’s, it’s get the foundation house and uh uh set before making those big investments because those reserves and that financial foundation is what you’re going to lean back on um over the course of decades as you build wealth.
Mindy: Yes, And I have come across people who disagree with that, but their argument doesn’t hold water and you can quickly ascertain that they don’t know what they’re talking about. So, everybody that I know that I respect as a financial person uh is saying the exact same thing. You have to have a firm foundation, otherwise everything else is going to go to to garbage. Let’s use that word.
Scott: There you go. All right, Scott, should we get out of here?
Mindy: Let’s do it.
Scott: That wraps up this episode of the Bigger Pockets Money podcast.
Mindy: He is Scott Trench and I am Mindy Jensen saying so long King Kong.
Speaker 1: If you enjoyed today’s episode, please give us a five star review on Shopify or Apple.
Mindy: And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.
Scott: Bigger Pockets Money was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the Bigger Pockets team for making this show possible.
