Mindy: Today, our guest will introduce you to a nine-step method that will make your individual path to financial independence look crystal clear.
Scott: That’s right. Our guests today are Brian and Bo from The Money Guy Show. That’s Brian Preston and Bo Hansen. And they’re joining us today to break down a step-by-step system they call the Financial Order of Operations. So, really fun stuff to discuss, lots of enthusiastic debate and spirited back and forth on, you know, hey, where’s real estate in this process? And those kinds of things. So always fun to hear about these processes and beat them up from a logic perspective because this is a right answer to the question of what to do with your money. May not be the right answer, but it is a, for you, but it is absolutely a phenomenal one that has world-class expertise and decades of experience that have gone into designing it.
Mindy: Yes. You know, unlike Dave Ramsey’s seven baby steps, this one is a little bit different. We’ve, it’s comprehensive and it really goes beyond the basics and it leaves room for personalization, which is the absolute key to this particular set of nine steps. So I’m super excited to bring them into our show.
Mindy: Hello, hello, hello and welcome to the BiggerPockets Money podcast. My name is Mindy Jensen and with me as always is my super fan of the step-by-step process co-host, Scott Trench.
Scott: Thanks Mindy, great to be here with my orderer of operations on the BiggerPockets Money podcast, Mindy Jensen. As always, we’re here to make financial independence less scary, less just for somebody else, to introduce you to every money story and every process for what to do with your money, designed by world-class experts, because we truly believe that financial freedom is attainable for everyone, no matter when or where you’re starting.
Mindy: Brian Preston and Bo Hansen, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you guys today.
Guest: Hey Mindy, hey Scott. Thanks for having us on. We’re super excited to be here too.
Mindy: Brian, I want to jump right into it with the concept of the financial mutant that you mentioned in your new book. Can you tell us who this person is?
Guest: I call that, look, you didn’t have to get bitten by a spider, you didn’t have to get exposed to gamma radiation. You are a financial mutant when you understand what every dollar has the opportunity to become. And I’ve tried to just, you know, highlight that and then teach it. So even if people aren’t born with it or pick it up at an early age, anyone can become a financial mutant if you train yourself right.
Guest: I love what you said right there. Anyone can do it. Anyone can become it. But some people are kind of born that way and I think Brian, you say you’re even one of those people. You were a financial mutant at the very beginning, even when you used to do what, like the $7 date night or something like that. Like you had it figured out from an early, early age.
Guest: Yeah, it really attracted the ladies taking them out and telling them, hey, our budget’s $7.
Mindy: Another way to frame that is it helped me to eliminate people who didn’t want to be within your financial framework.
Guest: It was a great screening process. That’s for sure. For sure, for sure.
Scott: I think that there’s like, it’s like an instinct versus a learned habit here about accumulate having dollars come into your life, uh, in terms of more, you know, more is coming in than is flowing out at the highest level. But after that, there’s an order, there’s like something, what do you do with those dollars? And I think that’s something that I’m really interested to hear from you guys is you have a, a financial order of operations. Can you tell us about this and how you’ve come up with this?
Guest: Oh man when you say it, I mean you can’t, you can’t help but almost shake it when you when you hear that. You know, the financial order of operations, just like math, you know, if you think about math, if you don’t know PEMDAS, you’re not going to get the right answer and you see this all over social media. Money is exactly the same way. If you don’t make the right decisions financially, you will not end up on the easier path or the best path to building wealth. And that’s why we start at the beginning, making sure cash and things like that with highest deductible covered. We take advantage of the employer match to get that to take advantage of all that free money. We avoid or pay off the high interest. We then come back to cash and get you a little bit extra in those emergency reserves in case you have bigger things like lose your jobs, and then we have Roth, we have max out retirement, we have hyperaccumulation, more to come on that because that just really means that you start thinking about how you’re going to use this money. Then prepaid future expenses, which I like to say the the good time name for this is abundance goals and then number nine is paying off that low interest debt. The big thing for you guys Mindy and Scott is to know, I always ask myself is this system successful for the person that came up with it because it made them wealthy or did the system work so well that it actually created success for not only the person that created but also the people around them. And I’m I’m here to tell you because you know, Bo and I by day are fee-only financial advisors. This system is what we do with our clients and it’s actually created the success before, you know, we started sharing this. So, I always want to make sure I give the chicken or egg discussion so people know that this system is actually road tested. We do a Q&A show every Tuesday and it works out well.
Guest: Yeah, I think I think the idea behind it was, you know, in the personal finance space so often people say, hey, it’s pretty simple. You just spend less than you make. And while that is huge. I mean, discipline is probably one of the single biggest things you can do to set yourself on solid financial footing. A lot of folks, and some of our family members included, they were great at saving, but they would just take that money and throw it into a savings account or bury it under the mattress or put it in a coffee can in the backyard, and that’s not exactly the best way to get your dollars working as hard for you as they can. So that’s why we came up with a nine tried and true steps of what you should do with your next dollar so that you can optimize so that you can work towards financial independence.
Scott: Yeah. I I think it’s it’s called strategy, right? I mean, one is accumulating dollars and bringing them, you have to have a net inflow in order to build wealth in any format, but you multiply your results with strategy here.
Mindy: We’re digging deeper into Brian and Bo’s nine-step system to financial independence right after this quick ad break.
Scott: All right, as Mindy likes to say, welcome back to the BiggerPockets Money podcast. So, I’d love to I’d love to learn more about, you know, or dig deeper into why this order of operations and maybe we can just walk through the first two or three steps and kind of just hear why did you start there and how are we thinking through um that as the foundation for what’s to come next.
Guest: Yeah, we’re not the first system out there. I mean, there’s a lot out there that will say a thousand bucks or you know, maybe somebody’s tried to modernize that and say 2,000. We’re like, well, wait a minute. You know, if you really should do for you. Yeah, if you get into the actual research of what why people file bankruptcy and other things. You find out that there’s sadly, it’s because they get into an emergency situation whether it’s a medical or or a car accident or something. There’s something that people don’t like wake up and say, you know what? Today I’m just not gonna have money or be broke. They usually have something really bad come their way. So we are like the first step is not a thousand or 2,000. It’s actually let’s cover your highest deductible. So that way the catastrophic stuff is is covered and you’re in a good place. So in practice, what this means is go look at your medical insurance. There’s a deductible likely. Figure out what that deductible is. Your renter policy or your car insurance policy or your homeowner’s policy, they’re also have deductibles. List them all out whatever the biggest number is, that’s the number to cover and then you can move on to step two.
Guest: Yeah, a thousand dollars is a is a fine place to start, but it’s on the path to step number one because ultimately, you just want to prevent yourself from being derailed. What we know in our financial journey is that things are going to take us off course. What we try to prevent is things taking us off course and leaving us there. So that’s why cover the deductible is step one is kind of the very first one. And then once you do that, then you get to go to the fun stuff. Then you get to go to the exciting one because step two is getting your employer match because we absolutely love free money. And get that free money. Yeah, most employers say, hey, if you put X dollars into your 401K or into your 403B or 457, we’re going to put money in there as well. Well, if we were to set up a table outside of our office and say, hey, we’re going to put a hundred dollars in this envelope, swing by our office and get it. Everyone of our employees would swing by and get that money. Well, your employer match at your company is the exact same way. And for a lot of folks, it’s like a hundred percent rate of return. If I put in one dollar, my employer puts in one dollar. So we think that is just so attractive. You cannot walk away from it. So once you’ve made sure you’ve covered your deductibles, you’re going to keep your life out of the ditch, then you got to go out there and get that free money.
Mindy: Ok, I want to go back to step number one really quickly because you said cover your highest deductible. I get a lot of people asking me, where do I put this? Should I put it in the stock market? And my thought, I have a very strong feeling about this. But what do you guys advocate? Where do you advocate holding onto your highest deductible, whatever that amount is?
Guest: Mindy, when people say, shall I put that in the stock market? I I always say that is an access to cash trap. People think that they can easily turn the stock market into cash. I fell into the access to cash trap with my home equity line. I had a home equity line back before the great recession with a debit card and a checkbook and I was like, this has got me, you know, covered. I don’t need cash. So I think cash is cash. You know, you can have it in a high yield savings account. You can have it in a um, your money market at your brokerage account, you can own Treasuries. but it needs to be in cash so that if you need money, you can get to it. Because I often say cash is like the air we breathe. We all take it for granted until you go underwater and then you realize how precious it is. And sadly Americans just don’t keep cash. I mean that that bank rate study that comes out every year that says how many Americans can’t come up with a thousand dollars. It’s consistently around 60%. This year it’s 56%. So have it in cash.
Scott: I want to ask about um how much cash you should have in your once you get to step four here with emergency reserves because I feel like all you’re saying is bridge this until you’ve taken your match and paid off your high interest rate debt, which we’ve covered a lot on the BiggerPockets Money podcast. But how much is enough for an emergency reserve? How what does good look like in the context of cash?
Guest: I think it depends on your situation, right? Like the general guidance that we give is you want somewhere between three months of your living expenses and six months of your living expenses. And what you’re really trying to protect against is a loss of income. If you don’t have income coming in, how can I make sure that I still keep this operation moving along? Now, if you’re someone who is a single income household, maybe one spouse stays at home or you have a vocation where it would not be super easy for you to find other work, then you probably want to air towards the larger six months side. But if you have two incomes in the household and you’re fairly evenly yoked or maybe you’re younger and you don’t have a ton of expenses, it’s okay to air towards the three months. And then as you even get to retirement or as you get to financial independence or moving along, well even then emergency reserve means something different for you. Rather than the standard like three months to six months of expenses, you probably want like 12 months to 18 months of expenses. So part of personal finance is making it personal to you. You have to understand where you are in your financial journey to make sure your emergency fund accurately and appropriately covers your risk.
Scott: Awesome. One of the keys here around whether how much cash to accumulate, at least as far as your philosophy seems to be constructed is around this concept of high interest rate debt versus low interest rate debt. What is high and what is low?
Guest: I always want the why to be very transparent for people because I think a better system is where you actually can see that some some thought and some math as well as the mindset stuff was taken into account. And we’ve had a lot of discussions. Now look, we’re in a unique time now with higher interest rates. But historically, there’s a risk premium, you know, that that what you expect to make off your money and then there’s a risk free rate of return what, you know, is not taking much risk. And if you kind of look at what that looks like, you can start figuring out for that answer’s going to be different for a 20-year-old versus a 40 or 50-year-old. And so we’ve we’ve often said especially like on student loan debt, you know, if you’re somebody in your 20s, that number is probably somewhere in in the six range for somebody in their 30s, that’s 5% or or greater and then for somebody in their 40s, it might be 4% specifically for student loans because you we do want to have a process to where you don’t have a a debt rate that you’re foregoing doing like a Roth IRA contribution or something that will not be eligible for you at some other time. But you have a mathematical reason why it’s okay depending upon where you are in your journey towards building wealth because I think that’s something that’s missing missing in a lot of the financial content out there.
Scott: Well what I heard is that a 6% interest rate is high for some for a young person and you should probably begin prepaying that in this context of the student loan debt. And I I’ve been wondering about this, I don’t know the answer here, but like suppose I’m a, I’m bought my first home and I have a seven and a half percent interest rate mortgage, right? Like, I would have said two years ago, three years ago, that anything over seven is clearly in the high range and you pay it off. Um, and that’s in the context of a home mortgage today.
Guest: Yeah, that’s why that’s why you notice I didn’t say mortgage. I said student loan because I know Bo can can clarify that too.
Guest: Yeah, I actually had a had that exact conversation this weekend. The the the determination around what becomes high interest and low interest really depends on your opportunity cost of capital. What’s the best use of my dollars? Now, in my opinion when it comes to mortgage debt, what I think is likely going to happen is at some point in the future, we’re going to see interest rates come down, most likely. So while right now interest rates for mortgages might be six, seven, seven and a half percent, I don’t know that it’s going to stay there long term. Well, what do we know happens when interest rates drop? Most home owners who locked in those high rates are going to refinance into a lower rate. So if we see rates come down to four and a half, 5%, I’m going to argue that most folks are going to refinance down there and it’s probably not going to be considered high interest debt. So for being in this six and a half, 7% mortgage, I don’t know that that’s a long-term mortgage rate. And so then you say, okay, well if I’m now deploying capital and paying that off, is that the best use of those dollars if I’m someone who’s in my 20s and 30s and I could potentially be having those dollars work for me for the next 30 or 40 years, or should I be satisfying that debt. For every dollar, it’s only going to save me six cents in interest or seven cents in interest at least for the next couple years until I refinance. So we tell people if you’re young, it doesn’t make a ton of sense right now to get incredibly aggressive paying off the mortgages because we don’t think that those mortgage rates are probably going to be what’s in place over the long term. Now, as you age, if you’re someone who does have one of those high interest mortgage rates and you are in your 40s or 50s and you have a desire to be debt-free by the time that you get to retirement, I do think that changes the calculus. But for young folks, mortgages are just not something we say it makes a ton of sense to get in a huge hurry to pay off right now.
Guest: Yeah, there’s there’s get wealthy behaviors and stay wealthy. So if you’re under 45, be careful getting too aggressive on on paying off that lower interest mortgage.
Scott: So I I think it’s a really interesting one and I I think this is one where I would I would just slightly disagree because I’m a little more skeptical that rates will come down. I feel that if rates do come down, you can cash out refinance um, or refinance the mortgage and get to the same same effect by by pulling the cash out. And I did this math on a recent home purchase and I’m going to prioritize paying off the mortgage um, because I I can get a straight up seven and a half percent return for the most part on it. And that’s like a guarantee for me and I don’t think I can beat that very easily uh at that rate or it’s just it’s very it’s very tempting on that front. I’m 33. So it’s like an interesting, I think we’re in this world where like now it’s like a question, right? Like like I I I’m like I like your answer. I think it’s great. I also think that three years ago there would have been no room for debate. Like it would have been silly for me to pay off a three, 4% mortgage. Now it’s a discussion to be had at this point. And so I think it’s really hard.
Guest: I will say though that in in the book I I put a a whole chapter on my regrets. And there was a a period, I’m nerdy enough and I’m old enough now. I’m in my 50s that I went back and figured out the years that I didn’t max out my Roth IRA when my income was low enough because I was starting the company and doing other things. I’ve actually gone and calculated what my imputed rate of return was since the ’90s and it was like over 9 and a half closer to 10% and if I would have done that, that’s the thing because you’re never going to get the ability to do your Roth IRA again in 1998 or 2000 for me, whereas I think that this whole discussion on interest rates, it’s back to my argument on get wealthy behaviors versus stay wealthy behaviors. And I don’t know and and the analysts don’t know either by the way. I think that’s what is makes this fascinating. Nobody really knows where interest rates are going in the next, you know, two years. I mean every year they make predictions, all these institutions, and if you saw how much they miss it by, you’d quit listening these people. They’re no better than the weather forecast that we may or may not take an umbrella to work with. And what I what I love is that uh there the beautiful thing about again, personal finance is there’s not one definitive way that you must do it, that you absolutely have to follow to make sure that you end up at the place that you want to. And so that’s why I think even for spaces like this where there are, you know, slight uh I want to say disagreements, but slight differences in opinion. It’s great. You know, one of one of the things that we really like is as we age, we think generally speaking, your risk level should decrease. So when people ask us that question, hey, I can just, you know, pay off my mortgage. then I’m going to do a cash out refi. And you’re right, mathematically that will work. But what you’re actually end up doing is increasing your leverage later on in life. Well for you that’s at 35 or 37 and 39. And generally speaking, we like to see debt loads decrease and risk decrease. You’re kind of with interest rate right now, some people are flipping that and realistically for a 33 year-old, it’s probably going to work out just fine. It’s not going to harm you, but it’s one of the things that we want to take into account because we don’t want people getting really excited about refying debt and casting it back out over 30 years if they’re, you know, 10 years from retirement or whatever whatever that thing may be.
Mindy: When I see pay off high interest rate debt, the first thing I think of is credit cards that are 22, 25%, like the double digit percentages. Even right now with a 7% mortgage, historically, we’re that’s like average. We’re not in a high interest rate environment, we’re in an average interest rate environment. There’s just what, 10, 15, 20 years of really, really low, ridiculously low interest rate environment that most people are comparing to. Like Brian, I’m, you know, in my 50s and I remember the 7% rates. I remember the 70s when we had, you know, double digit rates because that affected my family very specifically, uh, not because I was paying attention when I was seven years old, but…
Guest: That’s why it’s a fascinating thing because I mean, I think that Scott is spot on to to ask the question about mortgages, but you should know in our system and also in Millionaire Mission the book, mortgages don’t even come into the discussion of the the the step three because we’re, we’re talking about because I have that whole discussion in step nine because I do think mortgage debt is a completely different animal than when we’re talking about credit card debt, when we’re talking about student loan debt and auto loan debt because there is an asset sitting behind it that historically’s done some pretty good things. So that makes some unique characteristics that’s different than all those other elements. I guess you, you know, you could say student loans, but still there’s there’s even some discussion on that.
Scott: Is that difference primarily because it’s just a fixed payment for most people for 30 years and prepaying it does not actually change the overall cash outlay. It just ends the payment stream sooner? Like what what is the reason why it’s so fundamentally different?
Guest: Well also there’s an asset that that historically, I know great recession removed has has gone up and there’s such there’s a complete market that allows easy access to restate it. So if there was, I know Scott, you said you don’t know that you think interest rates are going down, but if there is, there’s a very easy mechanism to to fix that situation without with with pretty minimal cost especially if the the the bigger the margin on where interest rates go, the cheaper that cost because a lot of times the lenders will then start absorbing those costs for you. So that that’s really the access to to adjusting it. I always remind people when they’re paying down their mortgages early, especially if they haven’t built seven figure wealth is that you’re not really de-risking yourself until you make that last payment because the only way you can now get to the money is either you have to sell or refinance and I can’t promise you when things go ugly that those banks because I was, I was in 2010, I got the dreaded letter from Wells Fargo on May the 4th be with you by the way of 2010. Um they sent me a letter saying that they were shutting down my home equity line. So, I mean you it’s not always assume that you’re going to be able to get your money out of your house. Um so it’s back to Mindy’s question of make sure your cash is cash.
Guest: Yeah, I think I think the other really unique thing about your primary residence is it it’s a use asset different than a lot of the other assets you have and it’s one of the very only use assets that often appreciate through time. If you think about all the other things outside of business assets like rental homes or commercial property or other types of real estate, it’s one of the only use assets that we lever that appreciates through time. You go buy furniture at the furniture store and and finance it, it gets less valuable. You go buy a car and finance it, it gets less valuable. Houses are unique, primary residences are unique and that generally speaking, they go up in value. So you’d argue that it is a debt that has a return that does not actually depreciate value over time.
Scott: Well, I would love to keep going through the, you know, the order of operations here. I I did notice a step missing that I think should go between um step uh six and seven here, which is uh invest in real estate, right? So after you max out your retirement options, then you go into hyperaccumulation. Yeah, can you walk us through why why we skipped that step in this particular order of operation?
Guest: I wasn’t counting on you to say you disagreed on step three. It was really I figured this was going to be the the meat of the the the the disagreement. And look, Scott, you and I we’ve had conversations before. We love real estate. We have the building we’re in, we love commercial real estate. We’ve done, I’ve done vacation you know, rental, I’ve done residential rental. So I am a real estate investor as well. But I always the the thing and I sure we we came to some great consensus last time we we all talked about this is that I feel like so much on social media, everybody’s telling everybody jump right into real estate, but the thing you have to be careful about real estate because we just talked about levered debt when you when you’re taking, you have to cover the payment whether you have rent coming in or other things, that creates some additional risk that I want you to be at step eight of our system before you start buying all your your residential rentals or commercial because I need you to have steps one through seven underneath your foundation so you don’t have to make any desperate decisions just because some influencer on on the internet, you know, told you to go do 12 different, you know, residential flips or deals. And also and by the way, I’ll put an asterisk on the fact that house hacking like if you’re living in your house and you’re renting out, you know, and you have a quadplex or a duplex, we’ll we’ll put some different rules on that. But if you’re actually going to start um, you know, trying to create your real estate empire before you’ve funded your Roth IRA, you might you might have gone out of order a little bit.
Guest: Yeah, I think the other thing I’ll throw in that is that like stage of stage of life matters too because a lot of times we’ll have someone who graduates with a very attractive degree and they start with a super high salary. You know, a recent grad making 120,000 a year and will say, hey guys, I just graduated in May. It’s August. I’ve got your system and I’ve done all everything you said to max out. Now I’m ready to go buy my first rental property. And we’re saying, well, okay, you perhaps do not have as as large of a financial foundation beneath you that if the rental property were to go wrong or if you had to have a repair or if you had to have vacancies, if you’ve not prepared and planned for that contingency, I’d argue that you’re introducing that into your financial world a little too early. And I think you even talked about that as well. Before you go out and do that, you want to make sure that you actually have some wherewithal to navigate making it through the things that could potentially go wrong with real estate.
Mindy: Yes, yes, yes, yes, yes, yes. And I hope they don’t edit out any of my yeses. I could not agree more. There are there are small amounts of disagreement. Of course, somebody’s going to come in, well, I did this and it worked out great for me. That’s awesome for you. I’m so glad it worked for you. I’m looking right at Scott in my little monitor right here and he had a different course of action. But Scott is different than anybody else on the planet. He’s kind of an anomaly. He is an anomaly. It’s not kind of. but he also had a plan. He decided purposely not to invest or max out these parts of his financial future because he was focused on real estate. His circumstances are different than somebody else’s circumstances. So somebody hearing how Scott did it and they’d be like, oh yeah, I’m totally going to do that too. No, that’s probably going to be a bad idea unless you also have all the other qualifications that Scott had too when he did that. So I’m not trying to throw you under the bus, Scott. I’m trying to make you sound great, but also do as Scott says not as he did. You know, he doesn’t advocate for doing all the same things that he did. Although house hacking, I’m glad you put that into a a slightly different bucket because that’s a little different. I do something called live in flipping, which I would also include in that house hacking bucket. It’s a form of house hacking where I’m just taking a really ugly house. I’m living in it and I’m making it look nicer. It’s still my primary residence. So if something happens the whole market turns to, you know, badness, I still have a house to live in, even if it’s all flipped done. And I’m yeah, I could just stay there. So uh that is I I added your I added Scott’s invest in real estate in between.
Guest: Well, it sounds like it’s now step seven, eight and a half.
Guest: No, it’s step eight. I mean once you do it step eight and abundance goals, have at it. I mean, some this is this could be when you’re funding the kids college, this could be when you buy the Tesla, this could be when you start your real estate empire. I mean, it’s really, it’s an open canvas to to write your ticket because you’ve made all the the steps before. And and here’s the cool thing about being a financial meeting, you’ll spend a ton of time in step eight. So there’s decades to to really build this underneath you. I just even in my entrepreneur groups, I’m a member of some of these groups where we all get and we we kind of do mastermind discussions as business owners. And I even see entrepreneurs get this sideways a little bit. I’m like, look, you have to you have to actually get wealthy before you start doing some of these these activities that are on a have more risk, especially with leverage debt. And people try to skip some of that stuff and and I just don’t want them to make the desperate decisions because I I in 2008 through 11, I because I was doing taxes for 16 years is part of my background and I saw some people I used to daydream about their portfolio. I mean, I’d see their tax returns and I’d see all the schedule E and I’d see all the great rental stuff. and then I watched them go to practically nothing when those tenants quit paying rent in in the great recession. And that that stuck with me when I’ve seen these men that were crushing it basically be broken down where they’re begging the bank’s not to take the primary residence.
Scott: And that’s happening right now in the industry, especially in the commercial real estate space. And I know we talked about that a while back um, one of the the shows we did together uh in the commercial space. Absolute wreckage there. People losing a everything, all of the 100% of the equity in in investments all over the place.
Mindy: All right, we’re taking a quick ad break and we’ll be right back. Welcome back to the show. We’re talking with Brian and Bo from The Money Guy Show about the financial order of operations.
Scott: I do want to quickly reframe um, the conversation here because we’ve talked about steps one through seven. And we have uh and and by the way I think that some folks who are not familiar with the system may benefit from a quick refresher there where the first three are just get a basic emergency fund, 1,000, 2,000 bucks, cover up your highest deductible. Take your then step two is take your employer match, three is pay off high interest rate debt. Four is build emergency reserves and five and six are maxing out tax free growth with Roth and HSA contributions and maxing out your other retirements, retirement accounts. So the first six steps are basically a very uh logical order of operations in taking advantage of tax uh tax advantage accounts and building up the basics of a financial foundation. What exactly is step seven with leverage hyperaccumulation? That seems less uh less intuitive and needs to be a little bit more of an explainer.
Guest: Yeah, that’s if if if I didn’t have just my own little, I don’t know, hyper-accumulation is a concept. I remember when I read Millionaire Next Door and Dr. Stanley and and Danco did, you know, talked about people who are prodigious accumulators of wealth and and people who can save greater than 25%. That hyper-accumulation is is stuck in my brain and even the publishers like, you sure you want to keep hyper-accumulation? I was like, yes because this is beyond 25% savings rates is where all the other and you you said it so succinctly there, Scott is that it’s all tax and math driven. This is the first step where we start thinking, begin with the end in mind in the fact that how are you actually going to use these assets? If you think you’re going to retire at 50 or even 45, your account structure needs to be completely different than somebody who thinks they’re going to work until they’re 65 years of age. So this is why in step seven, we talk about the three bucket strategy with taxable accounts like your individual or joint brokerage accounts, your tax deferred, which is typically where you’re, you know, your your employer contributions are going to be and then your Roth, which are completely tax-free growth opportunities. You need to think about those accounts differently. Tax location does matter and account structure matters and we tried to build that into our in our system.
Scott: One of one of the things that I think is really interesting about personal finance and and you know, BiggerPockets Money, we cover financial independence and early retirement. like that’s typically what what I think the the the the person listening to this show is thinking about. Um and less kind of general personal finance here. But one of the things that I think that a lot of financial advice leads to is I buy the house, I max out the retirement accounts. 10, 15 years go by and I’m a millionaire. I’ve got $4 or $500,000 in my home equity, I’ve got $100,000 in my savings account, emergency reserve and after tax brokerage accounts and then I’ve got $600,000 in my my my IRA. This is a millionaire. But they they have no freedom. They have no ability to actually access any of that wealth today to start a business, you know, maybe 50 to 100 grand um to do that with, to buy a rental property, to do what else. So, you know, one of the exercises that I I did a while back is I just like took a piece of paper and drew a circle. I was like, okay, in 10 years, I’m going to have $2 and a half million dollars. This is what it will look like if I do this and this is what it will look like if I do this. I’m I’m I’m gathering that what you’re talking about is a much more sophisticated mechanism of kind of doing that exercise here. And if so, what what do you do? How do you coach people through this problem?
Guest: No, I mean it’s funny is that this is why I know you we share financial mutant brain sets is because you think like because I was thinking like we have a tool, our favorite thing to do, this makes us sound really nerdy is um, we do an annual net worth statement. And and and but it and we offer a free one. If you go to money.com/resources, there is a free net worth statement. But we also have at learn.moneyguy.com a net worth tool and one of the things the tool does is it shows you the three buckets. You know, your assets. It takes your net worth statement, turns it into that’s one of the dashboard things is because Scott I’ve seen millionaires come to me as prospects and they can’t pay cash for a car and I’m like, this is your you have focused so much on maximizing everything that the government lets you maximize that you haven’t figured out how to live your best life because you’ve focused only on the tax. You let the tax tail wag the dog. And that’s the exact opposite of what we’re pushing in step seven is you’ve got to start taking ownership and control of your money and and the tax are important. Look, this is coming from a CFA and a CPA, but man oh man, make sure you are taking an active role in your financial life because you only get one time on this planet that we know of. So make sure you’re actually being very deliberate with the planning. And I know strategy is a big part of your what you share and you write about on y’all’s content. So I mean it really is checking all those boxes as well.
Guest: And and for your audience when you talk about fire, right? when you talk about financial independence earlier on in life than traditional, you have to have this step because if you do, even if you are a multi-millionaire in the 401K and you want to check out of the workforce at at 50, you’re going to have a really hard time doing that if you’ve not thought about this. So the earlier you can think about it, the earlier you can begin planning and beginning with the end in mind, the more options you’re going to give yourself for whatever chapter 2.0 for you is and whenever chapter 2.0 starts for you.
Scott: But but doesn’t this, so this is awesome. I love this discussion. Doesn’t this involve hard, inefficient choices to get to that output? Because like many people who are very capable of becoming millionaires several times over in the next 15, 20 years, can’t max out their HSA and their Roth and take their 401K match and max that out and and and and and and, you know, a go through that whole funnel and build after tax wealth that they can then use to buy the the Tesla or the or the the the real estate investment if that’s what they choose. So where do you like at some point you have to say like, I’m actually not gonna max out my 401K and I’m going to put that money in here. Or is there another way to do it? How how do you help people with that problem?
Guest: Almost like there’s a system designed and it’s built into the name of the chapter. Hyper-accumulation is 25%. So that’s why we tell people, you can make 80,000 a year and still reach step seven as long once you get to the percentage, doesn’t mean you mathematically have to hit all 23,000 in your 401K because look, we we were giving a presentation to a room full of engineers and I still remember this hand goes up and she asked the question and she goes, ‘Hey, I I have kids. This seems mean that you’re telling me I can’t save for my kids’ college until I get to this.’ And I was like, ‘That’s why the 25% is a liberator is because all it is is saying, give us this percentage for the future. And then after you get to that and you get to step eight, you can do whatever you want with the money because it’s yours. You’ve checked the box and you’ve done it. Even if you want to prepay your mortgage when you’re 28 years old or 32, have at it. Just don’t skip those basic found- foundation items to get to a a a very healthy savings rate that will keep you on really good ground for the future.
Guest: And you’re you’re right. Like as you begin working towards these goals, personal finance has to be personal. It has to be about the goals that you have. Money is nothing more than a tool that allows you to accomplish those goals. And so what we’ve designed with the financial order of operations is an optimization mechanism. How do I do that? But just like you said, if I’m someone who wants to retire early, there might come a point in time where I need to focus as part of my 25% more on building up the after tax assets, more on doing that than strictly building up the 401K. And that’s something you have to understand what the end of your plan is going to look like so that you can begin crafting the steps now. And sometimes you would argue okay, maybe that isn’t, I think you called it an inefficient step. I would argue that’s probably more efficient than someone getting to age 52, retiring, having to pull all ordinary income assets out, and then having to pay a penalty on top of that. So what may seem inefficient actually is more efficient based on the goals you’re trying to carry out.
Mindy: Number eight, prepay future expenses. I would like a definition of this as well because I was, I was a little confused. What’s a future expense?
Guest: So like a really easy common example that most people have is paying for college education for their kids. It’s a future expense that you as a parent likely would like to incur and so you have a mechanism now where you can prepay that. You can pre-save for that future expense that you’d incur. So we would argue that it does not make sense to start saving for your kids or to start saving in a 529 until you get to step eight, until you get to that prepaid future expense. So that’s like a really clear and easy example that most people can hold on to. Something I know I’m gonna spend money for in the future that I can begin spending money for now. Uh a wedding for the children or something like that might be another example of a future expense that you can start prioritizing and allocating dollars towards.
Guest: Well and also Mindy, you called it because it is, that in the book it’s official title is prepaid future expenses. But that’s kind of like your uncle Robert that you also know is good time Bobby. So I mean the real title is abundance goals is that yes, it’s technically it’s prepaid future expenses, but really what we’re getting to is now you’re walking into abundance and this is where you get to do all those goals and that open canvas that I talked about later. So it’s actually fun time Bobby.
Mindy: Fun time Bobby. All right.
Guest: We’re going to talk about that one later. You go like what the heck are you doing? You just turned one of our steps from Robert into good time Bobby. So we’ll see if that sticks.
Mindy: Your last step is prepay low interest debt. And this is one of those things that I don’t agree with at all. But that’s my own personal situation. And just like people who have these two and 3% interest rate mortgages are paying them off anyway because they can’t stand the idea of debt. If this is something that, you know, you can’t stand the idea of having any debt, then go ahead and prepay those low interest rate deaths. I’m going to have a mortgage until the day I die because it’s 3%. I’m not paying that sucker off early at all.
Guest: I want to be very clear Mindy. Step nine, it’s a get to, not a have to, right? At step nine, if you’ve done all this, you can choose to pay off that low interest debt. I often say though, you know what’s just as cool as being debt-free? Having the ability to write a check and be debt-free. So I tell people all the time, if you so desire and one of your goals is to have low interest debt and have the arbitrage or your money’s working for you, it’s okay so long as you have the ability at the stage of life to write a check and pay that off because I would argue you are not truly financially independent until you can actually be financially independent, until you can actually knock that out. So if you choose to have a mortgage, that’s okay. Step nine is not something you must do, it’s something that you get to do at that stage in life.
Guest: Now, Mindy, y’all are not in the studio with us, but Bo and I, the only things we ever not get into fist fights or have debates about, but this is one of them. Um because I I pull up, you know, our wealth multiplier. It shows you what every if you go to money.com/resources, it shows you what every dollar has the potential to become based upon your age. And what I think about because I have a, I have a sub 3% mortgage and I owe just a little bit. It’s less than 100 grand at this point on it. I there’s a part of me, the the good with math part of me wants to be like Mindy and never pay it off. But then there’s the part of me that is now I’m at this older stage, wiser and I have all this money and I’m trying to figure out how do I not lose the game in some ways and then I pull up my wealth multiplier and I see at my age, a a a dollar has the potential to become $2.80. Compare and contrast that to the 20-year-old that it has potential to become $88. A lot of that multiplication has probably been behind me instead of ahead of me. So it’s more of how do you just de-risk. Once again, stay wealthy versus get wealthy. And I always give people the freedom that once you’re over 45, it because I don’t want you to get in a hurry when you’re 33 years old to pay off those low interest debts. But if you’re close, if you’re 54, 55, and you’re thinking you want to walk out of the workforce and leave the threshold of your W2 wages or however your entrepreneurship business that you have. The problem I have is I know as a financial advisor, as soon as people walk away from their day jobs, that first time the stock market loses 20% or the real estate market’s struggling, there is going to be a oddness to watching your portfolio and your financial struggles play out before your eyes um, because you don’t have the ability to say, well, I’ll just stay put and keep working and and go through this through through the the the craziness that we’re going through right now. It is already a psychological pull, I see on people. So if you want to pay off that debt, I’m all for it because true financial independence is being completely unencumbered no matter what is coming down the pipe. Um and that and that’s why I I tell people yes, step nine, if you’re I’d love you. The ideal in my eyes is to be completely debt-free when you walk away from your day job.
Mindy: Like what I I hear what you’re saying and this goes back to something that Scott said way at the beginning of the show, strategy and reason. If you’re just paying off your mortgage because you feel like that’s something you have to do. That’s not really a reason. If you have a reason, like you grew up poor and you can’t stand the idea of debt or you’re about to retire and you want to, you know, get rid of this mortgage and be done with it and whatever, those are reasons, those are strategies. But just doing something because somebody else said to do it or doing something because you don’t have anything better to do with your money. First of all, I could do something better with your money, so send it to me. But also like right now, if you have a 3% mortgage rate, you can make money putting all of that extra money that you would be putting into your mortgage into a savings account where you still have access to it just in case something should happen. So that’s a better use of your money in my opinion than just paying off your mortgage. But again, I’m not going to pay your mortgage at all. So if you can’t stand having a the the thought of having a mortgage, then pay it off. But do it because you have a reason, because you have a strategy and because you’ve thought it through, not just because you can’t think of anything better to do with your money.
Guest: It’s funny Mindy. Bo, where we’ve landed and if I didn’t have a book tour coming up, I’d probably still be on this point is that I have enough, I’ve just been building up and then letting my because my my cash is making 5.3%, you know. So that’s better than the three, but there will come a point where I’m going to just stroke a check because it’s just it’s not moving the needle that much and I don’t know. I I have so much it just I think it would feel good. I think there would be some emotion.
Guest: One less thing.
Guest: Yeah, just be one more thing. I it feels bad to say hassle factor, but it just be one less thing to deal with.
Scott: I I’m in camp Brian all the way and I think that there’s math behind it that hasn’t been fully explored and I want to give you an example. You have a $300,000 mortgage with 3% interest rate. It’s 1,250 a month just in PNI. So what does that come out to per year? It’s like a 15, 16,000. So if you multiply that by 25, you need multiply the 1250 payment by 12 and then by 25 to get the 4% rule. You need 375 Gs to generate enough from your portfolio per the 4% rule to FI on a $300,000 mortgage. So it just makes sense to pay off the mortgage if your if your goal is financial independence because the book that the value is um higher, you need more wealth than the balance in that mortgage to feel financially independent for the 4% rule. And we know from talking to many, many um financial independent people, nobody retires in the 4% rule. Everyone always shoots way past it and has some other um ace in the hole beyond that. So you multiply that up to a seven, eight percent interest rate mortgage. Now you need 800, 900,000 in wealth to generate enough passive income to pay your mortgage. It doesn’t make any sense in the context of financial independence, although you will perhaps to Bo’s point, have a bigger pile of wealth at the end of the decade as the decades march on uh and you forgo that opportunity cost. But it may sense to even pay off your mortgage at 3% in the context of FI if that’s truly your goal. um, today and it to me, definitely makes sense to pay it off at 7 or 8% um if the goal is FI earlier in life. Opportunity cost is the the argument, what is the spread you would achieve.
Guest: I think something we all would agree on because there is other commentary out there that says and this bolsters me up a little bit it says millionaires pay their motgages off in 10 years and then when I hear that stat out there, I’m always like, but is that their first home? Is that their fourth home. And and yes, when you actually dig in the details. I don’t want 20 somethings, 30 somethings because I think the average age is now 33 on on your first house purchase. Don’t hear a stat like millionaires pay their house off in 10 years and think they’re talking about you. They’re talking about 55-year-old millionaires um, paying off their mortgages super early. Just make sure, like I said, it’s back to get wealthy behaviors versus stay wealthy behaviors. I don’t want people getting that out of kilter and and making bad decisions.
Scott: Brian and Bo, thank you so much. Really always enjoy the conversations. Lots of good back and forth today. Really appreciate it. Really smart and and sophisticated approach you guys have built to personal finance here. Where can people find out more about you and where can people find this new book? When does it get released and where can they get it?
Guest: Man, this thing and I know I I feel like I’m talking to somebody who’s been there, done that on several occasions. The book launching is a fun endeavor, it’s hard work, but it’s great and and I would tell anybody who hasn’t fear, you know, has hasn’t heard our content, go to moneyguy.com. We’ve been doing content since 2006. And then if you want more information on this book and a specifically the financial order of operations, go to moneyguy.com/millionairemission. It’ll tell you everywhere you can buy it and there’s even going to be an audio book. I know people have asked since we’ve been doing a podcast for a long time. Yes, I did narrate my own book, um, which was pretty interesting and there’s even some stories that I could share on that.
Scott: Awesome. Well, thank you so much. Always great to chat with you guys. I look forward to getting that to getting the book. I’m on the pre-order list. So, can’t wait until it comes out. Thank you so much for all you guys do and um, can’t wait to chat with you again soon.
Mindy: Yup. Thanks Brian and Bo. We’ll talk to you soon. All right, that was Brian and Bo from the Money Guy Show. Scott, what did you think of the episode today?
Scott: Oh, always fun getting into it with these guys. They are just so well-standing what they do. You should definitely go check out their YouTube channel, their platform over at moneyguy.com. And of course, I’m really excited to read their new book, Millionaire Mission, a nine-step system to level up your finances and build wealth. You can find that at moneyguy.com/millionairemission. So I’m looking forward to reading that when it comes out on May 28th, 2024.
Mindy: Yep. I really love having the conversation with them. Even if I don’t agree with the exact specific order, they have a reason that they are suggesting each one and I love that they can back it up and you know, maybe you don’t agree with their order either and you move things around. Like they said personal finance is personal. So moving things around but having a reason behind it is the whole key to this.
Scott: Yeah, and I just want to make a quick point here. You know, we had somebody, you know, give us some nasty feedback in the comments about a recent episode with Morgan Housel, which by the way, I think was one of the best episodes we’ve ever recorded on this podcast and was just absolute delight. Um, but look like we we don’t have any financial affiliation or association with the Money Guys. We really like what they’re about. We like Morgan Housel. When someone has just written a book, that’s when all of the thought leadership that they poured into it for the last several years goes into constructing um that book and that topic and it makes for a great conversation in many cases. So, um, we did this episode because we like hearing from the money guys and we like hearing about the thought leadership that they’ve poured into a new book in the personal finance space, which is big news in our industry. And so we plan to continue to interview these experts, especially when they’ve come out with big thought leadership on an ongoing basis. So, uh just know that there’s not an ad or a sponsorship or any financial um association with these guys. Um we just like what they’re talking about and I’m excited to read the book when it comes out.
Mindy: Yes. And this is, you know, we’re not interviewing people who have no knowledge. We’re not interviewing somebody who was like, ‘Oh my goodness, you should totally use coupons at the grocery store.’ We’re interviewing people who are bringing in a different point of view and it’s up to you if you like that point of view, great. You should check out the book. If this isn’t really speaking to you, then maybe the book isn’t for you. But we want to present all of these different choices and let you make the decision.
Mindy: All right, Scott, should we get out of here?
Scott: Let’s do it.
Mindy: That wraps up this episode of the BiggerPockets Money podcast. Of course, he is the Scott Trench and I am Mindy Jensen saying peace out, trout.
Mindy: BiggerPockets Money was created by Mindy Jensen and Scott Trench. Produced by Hajar L. Edited by Exodus Media. Copywriting by Nate Weintraub. And lastly, a big thank you to the BiggerPockets team for making this show possible.
