Financial Freedom in 9 Steps: The Money Guy’s Financial Order of Operations

Mindy:
Today our guests 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 Beau from The Money Guy Show. That’s Brian Preston and Beau Hanson 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, Hey, where’s real estate in this process and those kinds of things. So always fun to hear about these processes and beat ’em 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 for you. But it is absolutely a phenomenal one that has world-class expertise and decades of experience that have gone into designing it. Yes,

Mindy:
Unlike Dave Ramsey’s Seven Baby Steps, this one is a little bit different. 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. 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

Scott:
Trench. 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 Hanson, welcome to the BiggerPockets Money podcast. I’m so excited to talk to you guys today.

Brian:
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?

Brian:
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 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.

Bo:
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 are a financial mutant at the very beginning, even when you used to do what the $7 date night or something like that, you had it figured out from an early, early age.

Brian:
Yeah, it really attracted the ladies taking ’em out and telling ’em, 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.

Bo:
It was a great screening process for sure. For sure,

Brian:
For sure.

Scott:
I think that it’s like an instinct versus a learned habit here about having dollars come into your life in terms of more is coming in than it’s flowing out at the highest level, but after that there’s an order’s. 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 financial order of operations. Can you tell us about this and how you’ve come up with this?

Brian:
Oh man, I see it. You can’t help but almost shake it when you hear that the financial order of operation, just like math, if you think about math, if you don’t know PDOs, 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 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 hyper accumulation more to come on that because that just really means that you start thinking about how you’re going to use this money.
And then prepaid future expenses, which I like to say 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 it but also the people around them? And I’m here to tell you because 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 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 and a show every Tuesday and it works out well. Yeah,

Bo:
I think the idea behind it was 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 bear 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 the 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. Yeah,

Scott:
I think it’s called strategy, right? I mean one is accumulating dollars and bringing them. You have to have an net inflow in order to build wealth in any format, but you multiply your results with strategy. Here we

Mindy:
Are digging deeper into Brian and Beau’s nine step to financial independence right after this quick ad break.

Scott:
All right. As Mindy likes to say, welcome brack to the BiggerPockets Money podcast. So I’d love to learn more about or dig deeper into why this order of operations and maybe we can walk through the first two or three steps and kind of just hear why did you start there and how are we thinking through that as the foundation for what’s to come next?

Brian:
Yeah, we’re not the first system out there. I mean, there’s a lot out there that will say a thousand bucks or maybe somebody’s tried to modernize that and say 2000. We’re like, well, wait a minute. If you really,

Bo:
What’s actually due for you?

Brian:
Yeah. If you get into the actual research of 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 a car accident or something. There’s something that people don’t wake up and say, you know what? Today I’m just not going to have money or be broke. They usually have something really bad come their way. So we were like, the first step is not a thousand or 2000. It’s actually let’s cover your highest deductible so that way the catastrophic stuff 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 going to have deductibles, list them all out, whatever the biggest number is, that’s the number to cover, and then you can move on to the step two. Yeah, a

Bo:
Thousand dollars 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.

Brian:
Get that free money. Yeah.

Bo:
Most employers say, Hey, if you put X dollars into your 401k or into your 4 0 3 B, your 4 57, we are 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, every one of our employees would swing by and get that money, well, your employer match at your company’s the exact same way. And for a lot of folks it’s like a hundred percent rate of return. If I put in $1, my employer puts in $1. 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. Okay.

Mindy:
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? Do you advocate holding onto your highest deductible, whatever that amount is?

Brian:
Mindy, when people say, should I put that in the stock market? 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 covered. I don’t need cash. So I think cash is cash. You can have it in a high yield savings account, you can have it in 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 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 how much cash you should have once you get to step four here with emergency reserves. 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 podcasts, but how much is enough for an emergency reserve? What does good look like in the context of cash? I think

Bo:
It depends on your situation, right? 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 month 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 reserves means something different for you. Rather than the standard three months to six months of expenses, you probably want 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?

Brian:
I always want the why to be very transparent for people. I think a better system is when you actually can see that 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 of what you expect to make off your money, and then there’s a risk-free rate of return what 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 often said, especially on student loan debt, if you’re somebody in your twenties, that number is probably somewhere in the six range for somebody in their thirties that’s 5% or greater. And then for somebody in their forties, it might be 4% specifically for student loans because we do want to have a process to where you don’t have a debt rate that you’re foregoing doing 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 in a lot of the financial content out there. Well,

Scott:
What I heard is that a 6% interest rate is high for a young person, and you should probably begin prepaying that in this context of at least student loan debt. And I’ve been wondering about this. I don’t know the answer here, but suppose I bought my first home and I have a 7.5% interest rate mortgage, right? I would’ve said two years ago, three years ago that anything over seven is clearly in the high range and you pay it off. And that’s in the context of a whole mortgage today.

Brian:
That’s why you notice I didn’t say mortgage, I said student loan. I know Bo can clarify that too.

Bo:
Yeah, I actually had that exact conversation this weekend. 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 6, 7, 7 and a 5%, I don’t know that it’s going to stay there long term. Well, what do we know happens when interest rates drop? Most homeowners who locked in those higher rates are going to refinance into a lower rate. So if we see rates come down to four point 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 point 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 twenties and thirties 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 6 cents in interest or 7 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 forties or fifties 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.

Brian:
Yeah, there’s get wealthy behaviors and stay wealthy. So if you’re under 45, be careful getting too aggressive on paying off that lower interest mortgage. So

Scott:
I think it’s a really interesting one, and I think this is one where 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 or refinance the mortgage and get to the same effect 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 because I can get a straight up 7.5% return after tax for the most part on it. And that’s a guarantee for me. And I don’t think I can beat that very easily at that rater. It’s very tempting on that front. And I’m 33, so it’s an interesting, I think we’re in this world where now it’s like a question. I like your answer. I think it’s great. I also think that three years ago there would’ve been no room for debate. It would’ve 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.

Brian:
I will say though, that in the book, I put a whole chapter on my regrets and there was a period, I’m nerdy enough and I’m old enough now I’m in my fifties, 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 nineties and it was over nine and a half, closer to 10%. And if I would’ve 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 the analysts don’t know either, by the way, I think that’s what makes this fascinating. Nobody really knows where interest rates are going in the next 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 to these people. They’re no better than the weather forecast that we may or may not take an umbrella to work with.

Bo:
And what I love is that 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 in a place that you want to. And so that’s why I think even for spaces like this where there are slight, I don’t want to say disagreements, but slight differences in opinion, it’s great. 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 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, whether for you that’s at 35 or 37 and 39, and generally speaking, we like to see debt loads decrease and risk decrease with interest rates. 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 refining debt and casting it back out over 30 years if they’re 10 years from retirement or whatever that thing may be. And

Brian:
Then the high percentage of how many people have mortgages still under 5% is higher than the percentage of mortgages that are six and 7%. Currently,

Mindy:
When I see payoff, high interest rate debt, the first thing I think of is credit cards that are 22, 20 5%, like the double digit percentages. Even right now with the 7% mortgage, historically 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 am in my fifties and I remember the 7% rates. I remember the seventies when we had double digit rates because that affected my family very specifically, not because I was paying attention when I was seven years old,

Brian:
But that’s why it’s a fascinating thing. I mean, I think that Scott is spot on 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 step three because 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 has done some pretty good things. So that makes some unique characteristics that’s different than all those other elements, I guess you could say student loans, but still there, there’s even some discussion on that. Is

Scott:
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. What is the reason why it’s so fundamentally different? Well,

Brian:
Also there’s an asset that historically I know great recession removed has gone up and 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 fix that situation with pretty minimal costs, especially if 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’s really the access 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 in 2010, I got the dreaded letter from Wells Fargo on May the fourth be with you by the way of 2010. They sent me a letter saying that they were shutting down my home equity line. So I mean, it’s not always assumed that you’re going to be able to get your money out of your house. So it’s back to Mindy’s question of make sure your cash is cash.

Bo:
Yeah, I think the other really unique thing about your primary residence is it is 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 appreciates 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 finance, it gets less valuable. You go buy a car and finance and it gets less valuable. Houses are unique, primary residences are unique in 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. Well,

Scott:
I would love to keep going through the order of operations here. I did notice a step missing that I think should go between step six and seven here, which is invest in real estate. So after you max out your retirement options and you go into hyper accumulation, yeah, can you walk us through why we skipped that step in this particular order of operation? I

Brian:
Wasn’t counting on you to say you disagreed on step three. It was really, I figured this was going to be the meat of the disagreement. And look, Scott, you and I, we’ve had conversations before. We love real estate, the building we’re in, we love commercial real estate. I’ve done vacation rental, I’ve done residential rental. So I am a real estate investor as well. But always the thing, and I sure we came to some great consensus last time 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 lever debt. 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 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 the internet told you to go do 12 different residential flips or deals.
And also 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 and you have a quadplex or a duplex, we will put some different rules on that. But if you’re actually going to start trying to create your real estate empire before you funded your Roth IRA, you might’ve gone out of order a little

Bo:
Bit. Yeah, I think the other thing I throw in that is that 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, a recent grad making $120,000 a year and they’ll say, Hey guys, I just graduated in May. It’s August. I’ve got your system and I’ve done everything you’ve 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 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. Yes,

Mindy:
Yes, yes, yes. And I hope they don’t edit out any of my yeses. I could not agree more. 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 then 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 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. He doesn’t advocate for doing all the same things that he did, although house hacking, I’m glad you put that into 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 badness. I still have a house to live in, even if it’s all flipped on and you just stay there. Yeah, I could just stay there. So that is, I added your added Scott’s invested real estate in between. Well,

Scott:
It sounds like it’s now step seven, eight and a half.

Brian:
No, it’s step eight. What you do at step eight in abundance goals have at it. I mean 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 an open canvas to write your ticket because you’ve made all the steps before. And here’s the cool thing about being a financial mutant. You would spend a ton of time in step eight, so there’s decades to really build this underneath you. Just even in my entrepreneur groups, I’m a member of some of these groups where we all get, and we kind of do mastermind discussions as business owners. I even see entrepreneurs get this sideways a little bit. I’m like, look, you have to actually get wealthy before you start doing some of these activities that have more risk, especially with the leveraged debt.
And people try to skip some of that stuff. And I just don’t want to make the desperate decisions because in 2008 through 11, because I was doing taxes for 16 years as 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 the great recession. And that stuck with me when I’ve seen these men that were crushing it basically be broken down where they’re begging the banks not to take their primary residence.

Scott:
And that’s happening right now in the industry, especially in the commercial real estate space. I know we talked about that a while back on one of the shows we did together in the commercial space, absolute wreckage there, people losing everything, all the a hundred percent of the equity in investments all over the place. Alright, we’re taking a quick ad break and we’ll be right back.

Mindy:
Welcome back to the show. We’re talking with Brian and Beau from The Money Guy show about the financial order of operations.

Scott:
I do want to quickly reframe the conversation here because we’ve talked about steps one through seven and have, 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, 1000, 2000 bucks cover up your highest deductible. 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 logical order of operations and taking advantage of tax advantaged accounts and building up the basics of a financial foundation. What exactly is step with leverage hyper accumulation that seems less intuitive. It needs to be a little bit more of an explainer.

Brian:
Yeah, 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 Danko talked about people who are prodigious accumulators of wealth and people who can save greater than 25% and that hyper accumulation is just stuck in my brain. And even the publisher was 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 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 and 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, you 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 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’ve tried to build that into our system.

Scott:
One of the things that I think is really interesting about personal finance and in BiggerPockets money we cover financial independence and early retirement. That’s typically what I think the person listening to this show is thinking about 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 four $500,000 in my home equity. I’ve got a hundred thousand dollars in my savings account, emergency reserve and after tax brokerage accounts and then I’ve got $600,000 in my IRA, this is a millionaire. But they have no freedom, they have no ability to actually access any of that wealth today to start a business. Maybe 50 to a hundred grand to do that with to buy a rental property to do. What else? So one of the exercises that I did a while back is I just took a piece of paper and drew a circle and I was like, okay, in 10 years I’m going to have two and a half million dollars. This is what it’ll look like if I do this and this is what it’ll look like if I do this. I’m gathering that what you’re talking about is a much more sophisticated mechanism of doing that exercise here. And if so, what do you do? How do you coach people through this problem?

Brian:
No, I mean what’s funny is this is why I know we share financial mutant brain sets is because you think, because I was thinking we have a tool, our favorite thing to do, this makes us sound really nerdy, it’s even romantic. We show it with our spouses is we do an annual net worth statement and we offer a free one. If you go to money guy.com/resources, there is a free net worth statement, but we also have learn.money guy.com a net worth tool. And one of the things the tool does is it shows you the three buckets 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, 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 focused only on the taxes, 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 the taxes 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. I know strategy is a big part of what you share and you write about on y’all’s content. So I mean it really is checking all those boxes as well.

Bo:
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 multimillionaire in the 401k and you want to check out of the workforce 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:
This is awesome, I love this discussion. Doesn’t this involve hard inefficient choices to get to that output? Because 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 go through that whole funnel and build after tax wealth that they can then use to buy the Tesla or the real estate investment if that’s what they choose. So where do you, at some point you have to say, I’m actually not going to max out my 401k and I’m going to put that money in here or is there another way to do it? How do you help people with that problem?

Brian:
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. That doesn’t mean you mathematically have to hit all 23,000 in your 401k because look, we were giving a presentation to a room full of engineers and I still remember this hand goes up and she asks the question and she goes, Hey, 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. If you even want to prepay your mortgage when you’re 28 years old or 32, have at it. Just don’t skip those basic foundation items to get to a very healthy savings rate that’ll keep you on really good ground for the future.

Bo:
And you’re right as you begin working towards these goals, personal finance has to be personal and 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 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 could 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 a little confused. What’s a future expense?

Bo:
So 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 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 5 29 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 onto something I know I’m going to spend money for in the future that I can begin spending money for now 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 to.

Brian:
Well and also Mindy you called it because it is that in the book its 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, 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 in that open canvas that I talked about later. So it’s actually fun time Bobby. Fun

Mindy:
Time Bobby. Alright,

Brian:
Well we’re going to talk about that one. You’re going like, what the heck are you doing?

Bo:
You just turned

Brian:
One of our steps from Robert, the good time Bobby. So we’ll see if that sticks. Your

Mindy:
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 can’t stand the idea of having any debt, then go ahead and prepay those low interest rate debts. 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.

Bo:
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, 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 where your money’s working for you, okay? So long as you have the ability at the stage of life to write a check and pay that off, I would argue you are not truly financially independent and then 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.

Brian:
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 ’em because I pull up our wealth multiplier. This shows you if you go to money guy.com/resources, this shows you what every dollar has the potential to become based upon your age. And what I think about, because I have a sub 3% mortgage and I owe just a little bit, it’s less than a hundred grand at this point on it. There’s a part of me, 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 dollar has a potential to become $2 and 80 cents, compare and contrast that to the 20-year-old that has a potential to become $88. A lot of that multiplication is probably 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, 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 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 as 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 struggling, there is going to be a oddness to watching your portfolio and your financial struggles play out before your eyes because you don’t have the ability to say, well just stay put and keep working and go through 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. And that’s why I tell people, yes, step nine, I’d love you. The ideal of mine is to be completely debt, debt-free when you walk away from your day job.

Mindy:
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 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, send it to me. But also 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 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.

Brian:
It’s funny, Mindy Beau, 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 cash is making 5.3%, 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 not moving the needle that much. And I don’t know, I have so much, I think it would feel good. I think there would be some emotional like and one less thing. Yeah, just be one more thing. It feels bad to say hassle factor, but it’d just be one less thing to deal with.

Scott:
I’m in Camp Bryan 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 1250 a month just in p and i. So what does that come out to per year? It’s like 15, $16,000. So if you multiply that by 25, multiply the 1250 payment by 12 and then by 25 to get to 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 goal is financial independence because the book that the end value is higher, you need more wealth than the balance in that mortgage to feel financially independent per the 4% rule. And we know from talking to many, many financially independent people, nobody retires in the 4% rule.
Everyone always shoots way past it and has some other ace in the hole beyond that. So you multiply that up to a seven, 8% interest rate mortgage, 9,800, $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 Bose point have a bigger pile of wealth at the end of the decade as the decades march on and you forego that opportunity cost, but it makes sense to even pay off your mortgage at 3% in the context of fire if that’s truly your goal today. And it to me definitely makes sense to pay it off at seven or 8% if the goal is fire early in life. Opportunity cost is the argument. What is the spread you would achieve?

Brian:
I think something we all would agree on because there is other commentary out there that says, and this stat boils me up a little bit, it says millionaires pay their mortgages 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 yes, when you actually dig into the details, I don’t want 20 somethings, 30 somethings because I think the average age is now 33 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 paying off their mortgages super early. Just make sure, like I said, it’s back to get wealthy behaviors versus stay wealthy. I don’t want people getting that out of kilter and making bad decisions. Brian

Scott:
And Beau, thank you so much. Really always enjoy the conversations. Lots of good back and forth today. Really appreciate it. Really smart 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?

Brian:
Man, this thing, and I know I feel like I’m talking to somebody who’s been there, done that on several occasions. Book launching is a fun endeavor. It’s hard work, but it’s great. And I would tell anybody who hasn’t heard our content, go to money guy.com. We’ve been doing content since 2006. And then if you want more information on this book and specifically the financial order of operations, go to money guy.com/millionaire mission. He’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, which was pretty interesting. There’s even some stories that I could share on that. Awesome.

Scott:
Well thank you so much. Always great to chat with you guys. I look forward 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 can’t wait to chat with you again soon.

Mindy:
Yep. Thanks Brian and Beau and we’ll talk to you soon. Alright, that was Brian and Beau from The Money Guy Show. Scott, what did you think of the episode today? Oh,

Scott:
Always fun getting into it with these guys. They are just so outstanding what they do. You should definitely go check out their YouTube channel, their platform [email protected]. 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 money guide.com/millionaire mission. So I’m looking forward to reading that when it comes out on May 28th, 2024.

Mindy:
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 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:
And I just want to make a quick point here. We had somebody give us some nasty feedback in the comments about a recent episode with Morgan Hausel, which by the way, I think was one of the best episodes we’ve ever recorded on this podcast and was just absolute delight. But look, we don’t have any financial affiliation or association with the money guys. We really like what they’re about. We like Morgan Hausel. 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 that book and that topic. And it makes for a great conversation in many cases. So 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 just know that there’s not an ad or a sponsorship or any financial association with these guys. We just like what they’re talking about and I’m excited to read the book when it comes out. Yes,

Mindy:
And we’re not interviewing people who have no knowledge. We’re not interviewing somebody who is like, oh my goodness, you should totally use coupons at 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. Alright, Scott, should we get out of here?

Scott:
Let’s do

Mindy:
It. That wraps up this episode of the BiggerPockets Money podcast. Of course, he is the Scott Tre and I am Mindy Jensen saying Peace out trout. BiggerPockets money was created by Mindy Jensen and Scott Trench, produced by Hija Ed, by Exodus Media Copywriting by Nate Weinraub. And lastly, a big thank you to the BiggerPockets team for making this show Possible.