← BiggerPockets Money Podcast
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- [00:00]
A
Mindy and I are so grateful for the following sponsors who make BiggerPockets money possible.
- [00:06]
B
When you want more Start your business with Northwest Registered Agent and get access to thousands of free guides, tools and legal forms to help you launch and protect your business all in one place. Build your complete business identity with Northwest today. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides who are real people who know your local laws and can help you and your business every step of the way. Northwest makes life easy for business owners. They don't just help you form your business, they give you the free tools you need after you form it, like operating agreements, meeting minutes and thousands of how to guides that explain the complicated ins and outs of running a business. And with Northwest, privacy is automatic. They never sell your data and all services are handled in house because privacy by default is their pledge to all customers. Visit northwestregisteredagent.com money free and start building something amazing. Get more with Northwest registered agent@northwestregisteredagent.
- [01:06]
A
Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye opening. That's why I like Monarch. It helps you see exactly where your money is going and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch. Monarch is the all in one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the Code Pockets. What I personally like is that Monarch keeps you focused on achieving, not just tracking. You can see your budgets, debt payoff, savings goals and net worth all in one place. So every decision actually moves a needle. Achieve your financial goals for good with Monarch, the All in one tool that makes money management simple. Use the code pockets@monarch.com for half off your first year. That's 50% off@monarch.com for code pockets. When I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage, fast liquidity and consistent returns. These are some of the reasons why I'm Excited to partner with Pine Financial Group. Their Fund 6 offers investors exposure to real estate credit, largely for construction and rehab, with loans originated by an experienced originator with over $1 billion in origination volume. They offer investors an 8% preferred return paid monthly and a 7030 LP GP split of everything over 10% paid annually. The lockup period nine months with liquidity available within 90 days. After that nine month commitment, the fund is open to accredited investors only. The fund's minimum investment is typically $100,000, but Pine Financial is able to reduce that minimum for BiggerPockets Money listeners to a minimum of $25,000. Full disclosure I am personally invested in this fund through my self directed ira. Pine Financial is sponsoring this message and our podcast. Go to biggerpocketsmoney.com Pine P I N E Please note that returns are not guaranteed and may vary based on fund performance.
- [03:07]
B
Today we are breaking down a simple yet powerful roadmap to building real, lasting wealth in what we are calling the Financial Stability Framework. This strategy is all about getting the fundamentals right, paying off debt, building your emergency fund and consistently investing in low cost index funds. You might be thinking, I'm already doing all of that. We'll also cover how to hit that key 15 retirement savings rate, use tax advantaged accounts the smart way, and make the tough decision to prioritize your own financial future before anything else. If you want a clear no BS path to financial independence, this episode is your blueprint. Hello, hello, hello and welcome to the BiggerPockets Money Podcast. My name is Mindy Jensen and with me as always is my financially stable co host Scott Tretch.
- [04:01]
A
Thanks Mindy, Great to be here and talk about a straightforward financial framework with you today. As a reminder at BiggerPockets Money, our goal is how do we take financial planning and evolve it as a concept, right? Not so. It's not just a series of best practices or checklists, but there's actually a strategic diagnosis for a specific household, a specific set of situations and how to play their unique strengths and advantages dial into the core levers and move them towards a specific target. So we are going to produce dozens over the next couple of years of what are our best efforts. Hopefully you find them sophisticated comprehensive financial planning templates. You know, spreadsheets, those kinds of things that help power your decision making. And today we're going to be talking about a pretty standard situation. A middle class household that wants to follow a basic financial plan that moves them towards traditional retirement. We've covered almost a millionaire household in the past. We're going to talk about real estate investing, we're going to talk about complex business owners. We're going to talk about 23 year olds who want to retire by 35. We're going to talk about, you know, people who want to catch up at age 50 to age 65. This is not one of those specialty situations that is really aggressively pursuing wealth creation and making major sacrifices or taking major risks to get there. This is a framework for somebody who is much more traditional in the world of personal finance. And this is our take on it and our attempt to provide a really good plan for it. This will be accompanied by a financial planning template. It's about 19 pages and it will be accompanied by a financial projection model which will be a spreadsheet that will help this, this household compute, you know, and we'll have a pretty sophisticated tax engine as well in there, but kind of show the trajectory that they're going to have based on the assumptions in this plan. So those are available@biggerpocketsmoney.com resources and with that, let's get into this plan.
- [05:49]
B
Well, let's talk about who we are talking about. What does our family in this financial plan look like?
- [05:57]
A
Yeah, this is a stable builder household. This is a married middle class family. They're in their early to mid-30s, they've got two kids at home. They're either dual income earners generating about $100,000 a year in household income, or it could be a single earner earning this much for the household, a breadwinner and a stay at home parent. And this household earns enough to build real wealth, but needs a crystal clear consistent system and needs a long term target because they're not going to be achieving a 50% savings rate and retiring in 17 years like we talk about a lot in the financial independence, retire early world. This is a household that doesn't have countless hours to spend researching personal finance. And they're not undisciplined, they just don't have a clear structure yet. And we think we can give a world class financial planning template for this household that crystallizes the best advice of places like Bogleheads, Dave Ramsey, the Money Guy, Ramit Sethi and all these other folks who have done wonderful work.
- [06:52]
B
And let's start with their starting point. Where are they at right now as we are starting to give them some suggestions for what they should do with their money?
- [07:02]
A
Sure. So a lot of this data comes from the Bureau of Labor Statistics and we've got a Median household net worth for someone in this type of household at about $120,000. That's going to be broken down by $55,000 in their retirement accounts, $10,000 in cash and emergency reserves, $15,000 in their taxable brokerage, and about $40,000 in home equity building to $120,000 in net worth like we mentioned. And then from a cash flow standpoint, this is a household again, that's generating about 105,000. Again, that's the median for a four person household in their 30s. And then we're going to be estimating about $78,000 in take home pay after deferrals and taxes. And that's going to lead to monthly take home pay of about $6,500.
- [07:48]
B
Okay, let's look at their spending. Do they have any places they can cut spending?
- [07:52]
A
Everyone always has places that they can cut spending. But we're going to say for the purposes of this show that no, not really. This is a pretty reasonable household spending chart. You want to walk through the expenses, Mindy?
- [08:02]
B
Sure. So we've got on a monthly basis $2,000 a month for their housing. They live in a, an affordable area and they probably have one of those 3% mortgages you hear so much about. They spend twelve hundred dollars a month on child care and activities for the kids, $900 a month on groceries, $600 a month on transportation, 400 on health care, $200 on their Internet phone streaming services, that kind of thing, $400 on clothing and gifts and things like that, miscellaneous $300 on travel and family fun for a total of $6,000 a month or $72,000 a year. Okay, so they're spending 6,000 and they're bringing home 6,500. That only leaves about $500 a month for investing. That's a little bit less than the 15% we want them to have.
- [08:53]
A
That's why we're here. We're going to give them a plan to put them on track for their goals. So what are the goals for this household?
- [09:00]
B
Mindy Scott Their household goals are to be on track for traditional retirement between age 60 and 65. They want to live a mostly debt free life. They want to maintain strong financial stability and have a functional emergency reserve fund. They want to save meaningfully for their kids education and they'd like to keep the plan simple, automate as much as possible and make it sustainable.
- [09:27]
A
Okay, the first target is going to be to get this household to saving 15% of their gross household income. So we're going to get there in basically three ways. Right. Remember, right now we're saving $500 a month and we need to ramp that to about $1,300 per month. That's a big ramp. And we're going to get there with three in three paths. Right. First, we're going to keep our expenses flat for the next several years and we're going to allow our income to grow. This is a core part of financial planning that is missed by many households. You may not be able to achieve your savings target today, but if you keep your expenses flat and your income grows, which it should in many of these cases over a very long period of time with a disciplined career, you're going to see those 3 to 5% annual cost of living adjustments in many or most years. And there should be one or two promotions over a 10 year period for a typical household in a scenario like this. So that's the first thing that's going to help us ramp to that 15% savings target over the next five to 10 years. The second thing we're going to model in is going to be child care. Rolling off childcare is a major expense for a household like this, and that rolls off after children enter public school around 5 to 6. And that's going to make a major dent in this household. What is it, $1,200 a month child care expense target? It's not going to fully go away, but it's going to make enough of a dent to allow us to get to that 15% savings target. And then we're going to go line by line through the budget and look for small deliberate trims like $100 to $200 a month across discretionary categories. And almost every household is going to be able to find that to begin that ramping process today. So the realistic path this household is that you don't have to get to 15% savings rate this year, get there over the next two to five years and sustain that through to retirement, you're going to be just fine here. And those are going to be several of the big, the big items here. Okay. The second thing we're going to talk about is going to be emergency reserves. Do you want to cover this one, Mindy Scott?
- [11:19]
B
Their first goal, get their emergency reserve funded. They have $10,000 in cash. That's just not enough. That's not even two months. We want them to have a minimum of six months in emergency reserves. That's $36,000. So if either or both of them have a Company match. We want them to contribute to their 401k to get the entire company match and then we want them to stop investing in anything else until they have $36,000 in their emergency reserve. That is a six month cash reserve to cover any emergency that pops up over time. After they've got the $36,000, then they can get back into starting to invest for retirement.
- [12:05]
A
Perfect. Yeah. And we're going to keep this emergency fund in a high yield savings account, something like an ally bank or you know, some sort of online bank ideally that has, that offers a good interest rate because it is a reasonable amount of cash. And a few hundred bucks a year makes a big difference on a pile of cash like this that's sitting there. So we want to, we do want to earn yield on it in a high yield savings account, but we want to keep it liquid. This is not an investment is our buffer against the world. That allows us to never have to sell our investments in an emergency at a time when everything's going poorly, because that's how that works.
- [12:35]
B
You're not making optimal decisions with your emergency fund. You are not investing it in the stock market or putting it into Bitcoin or doing anything like that. It's cash. The only optimization you can do is the high yield savings account.
- [12:50]
A
The second thing we're going to do after we have our emergency reserve is we're going to build up our retirement savings. So the goal here is 15% of gross household income being saved for retirement. This, you know, the 401k match helps a lot if you have one in your household. But we're going to assume for this particular example that this household does not have access to a 401k match as part of their, their employment, which is common among many salaried employees in this range. This household currently without a 401k match spends about $6,000 a month and brings in $6,500 a month. So that there's a gap between where they need, where they are $500 in savings and where they need to be about $1,300, which is about 15% of $105,000, the second target we're going to have is to save about 15% of gross household income for retirement. So after we've ensured stability with our emergency reserve, which will allow, will allow a buffer between us and having to sell our investments, which is a real killer of the compounding journey. And that's why the emergency reserve is so important and built first after we've done that we need to start saving about 15% of gross household income, which in this case is about $15,750 per year or about $1,300 per month. That can include and largely will include contributions to retirement accounts and can include an employer match. So if you've got a 5% employer match and you contribute 5% of your salary and get 5% of that, get that match, 100% match on that, that's 10% savings rate right there on household gross income and can make the target very achievable. But for this analysis, we're going to assume that you don't have an employer match. And we're going to say how do we get to this savings target if we do not have an employer match? Because there's a big gap, right? We're only saving 500 bucks a month. We need to get to closer to 1300 bucks a month to achieve our target. And this is where a lot of people get stuck, where they think of their model that it's really hard for a middle class household that's unfamiliar with the basics of money to understand the compounding journey. We are going to get a raise over the course of a career. We're going to get promotions over the course of a career and our income is going to grow. We're going to see a cost of living adjustment in many or most years. We're going to get a bonus in many, perhaps most years or some years at least in many professions, especially as we progress through our careers. And we should plan on one to three promotions over a 10 year period in a given profession. So that's going to be a major driver of our model and plan and we should count on it. But we should also make sure that when those raises come, they're being banked to save for retirement and not going into additional consumption until we hit our savings target. Now, the second thing that's going to ramp up our savings rate is going to be child care roll off. This household has $1,200 a month or $14,400 a year in child care. And that's going to go away or diminish greatly once the children hit school age and presumably attend public school. So most of that, most or all of that line item is going to, is going to disappear and maybe replace with some other costs offsetting the reduction. But even half of that being redirected toward retirement savings is going to almost entirely close our gap. And the third thing we're going to do is we're going to make modest spending adjustments and just have disciplined control over our budget. We don't have to go through and make wholesale cuts. But I believe that a household that does a disciplined monthly financial review and looks for wasteful spending can easily eliminate 100 to $200 a month across discretionary categories. And that's something they can do today following hearing this podcast or watching this video. So I think that the most realistic path is going to be some combination of these three things. There's going to be a raise or some kind of income boost at some point over the next three to five years. There's going to be some kind of reduction in child care cost and there should be some wins that they can find in their budget and that should allow us to carry through to this 15% savings rate on our income here. If those options are not available, then we're going to make hard choices about the big expenses in life and which include housing, transportation and food. That's what we would look if none of those three were realistic. But I think that the vast majority of people who are listening to this in this category will find some combination of those three things, more than enough to offset that gap.
- [16:46]
B
Scott, what's going to help both their emergency fund savings and ramping up their savings for retirement is keeping debt off the books. They need to avoid all consumer debt. I'm not including their mortgage here. They most likely have a very low mortgage rate with that $2,000 a month mortgage pay. So I want them to get rid of all their other debt. They don't seem like they have much if any debt, but I want them to keep that off the books. I don't want them to go buy new cars. I don't want them to charge a bunch of stuff on their credit card, not have the cash for it, and then not be able to pay it off. So keeping debt off the books is a huge help and so far they're doing a good job.
- [17:28]
A
Yep. We have no qualms, for example, with the Dave Ramsey baby steps approach and the total avoidance of personal debt for this household. I think it's fantastic advice and is completely appropriate. This household does not need to use any leverage beyond continuing to keep their mortgage in place until later on in their journey in order to achieve their goals. And we would highly recommend against it. It just adds complexity and is needless in the situation. All right, next up we're going to go with simple index fund investing. This household, if they want to do more research, should look up the Bogleheads philosophy. We're going to invest in some boring, well diversified broad market cap weighted low cost index funds. Total US Stock market index funds are going to be all this household needs, most likely over a very long period of time to achieve their goals. If they want to fiddle with investments and learn more about it, they can consider optional international exposure. But we're totally fine with an S&P 500 fund for this household over a very long period of time. We're going to look for S&P 500 passively managed index funds with expense ratios under 0.1%. We love stuff from Vanguard. There's, there's funds from Fidelity and Schwab as well that, that come in at very low expense ratios. That's the number one thing for this household to watch is even a few basis points of expense ratio can make a big, big difference in this. And then we're going to automate our contributions. Right. This is a great thing that Ramit Sethi talks about all the time on I will teach you to be rich or money for couples and his in his content. But automating this is going to be a key. Taking it right out of the paycheck, putting it into the 401k or the, the Roth IRA if that's your preference, or the HSA if you have access to one of those. We'll talk about those in a second. But putting making those contributions automatic coming out of the paycheck every single month, paying yourself first and then making sure that you have that set up to go into one of these low cost index funds that are statistically some of the best ways to passively build wealth ever produced.
- [19:19]
B
Yep. Scott, you can't spend it if it never even hits your checking account.
- [19:24]
A
Absolutely. And we have a very long term time horizon in this household. We do not need access to these funds because we have our emergency fund for a very, very long time. We don't need them until, until retirement. And we can afford to be very, very aggressive in that context and accept lots of volatility along the way in the journey because it's not relevant to our current decision making.
- [19:43]
B
When you want more, start your business with Northwest Registered Agent and get access to thousands of free guides, tools and legal forms to help you launch your business all in one place. Build your complete business identity with Northwest today. Northwest Registered Agent has been helping small business owners and entrepreneurs launch and grow businesses for nearly 30 years. They are the largest registered agent and LLC service in the US with over 1500 corporate guides who are real people who know your local laws and can help you and your business every step of the way. Northwest makes life easy for business owners. They don't just help you form your business, they give you the free tools you need after you form it, like operating agreements, meeting minutes, and thousands of how to guides that explain the complicated ins and outs of running a business. And with Northwest, privacy is automatic. They never sell your data and all services are handled in house because privacy by default is their pledge to all customers. Visit northwestregisteredagent.com money free and start building something amazing. Get more with Northwest registered agent@northwestregisteredagent.com money
- [20:42]
A
free when I evaluate debt funds, I look for things like first position loans, personal guarantees, deep experience by the fund operator, low fund leverage, fast liquidity and consistent returns. These are some of the reasons why I'm excited to partner with Pine Financial Group. Their Fund 6 offers investors exposure to real estate credit, largely for construction and rehab, with loans originated by an experienced originator with over $1 billion in origination volume. They offer investors an 8% preferred return paid monthly and a 7030 LP GP split of everything over 10% paid annually. The lockup period is nine months with liquidity available within 90 days. After that nine month commitment, the fund is open to accredited investors only. The fund's minimum investment is typically $100,000, but Pine Financial is able to reduce that minimum for BiggerPockets Money listeners to a min of $25,000. Full disclosure I am personally invested in this fund through my self directed ira. Pine Financial is sponsoring this message and our podcast. Go to biggerpocketsmoney.com Pine P I N E Please note that returns are not guaranteed and may vary based on fund performance. Tax season is one of the only times all year when most people actually look at their full financial picture, including income, spending, savings, investments, the whole thing. And if you're like most folks, it can be a little eye opening. That's why I like Monarch. It helps you see exactly where your money is going and more importantly, where your tax refund can make the biggest impact. Because the goal isn't just to look backward, it's to actually make progress. Simplify your finances with Monarch Monarch is the all in one personal finance tool designed to make your life easier. It brings your entire financial life, including budgeting, accounts and investments, net worth and future planning together in one dashboard on your phone or your laptop. Feel aware and in control of your finances this tax season and get 50% off your Monarch subscription with the code pockets. What I personally like is that Monarch keeps you Focused on achieving, not just tracking tracking. You can see your budgets, debt, payoff, savings goals and net worth all in one place. So every decision actually moves the needle. Achieve your financial goals for good with Monarch. The all in one tool that makes money management simple. Use the code pockets@monarch.com for half off your first year. That's 50% off@monarch.com code pockets.
- [22:44]
B
I'm going to want to see this couple get a high deductible health care plan if their employer offers it and encourage their employer to offer it if they don't. And and with the high deductible health care plan comes the ability to contribute to an HSA. The contribution limits for 2026 are 8750. $8750 can go in tax free. You can spend it tax free on qualified medical expenses and if you don't use all of your HSA account, you can start withdrawing it and just paying normal income tax rate rates after you're 65. But here's the best thing. If they have the ability to cash flow their random medical expenses, they can save and save and save and invest this. It doesn't just sit in a bank account. You can invest this in the stock market and see your HSA grow and then you pull out the money to reimburse yourself again tax free down the road after it has had time to grow. Maybe they have somebody gets their appendix out and they need to, you know, take money out of there, fine, that's what it's there for. But if they all get to 65 with their appendixes, they can just have this giant pile of cash that they can start pulling out or reimbursing themselves later. So you definitely want to keep track of your receipts from like anything medical, not healthcare costs, not premiums. Healthcare premiums are not HSA deductible but your doctor's visits, co pays your medicine, things like band aids and contact solution and there's a list of like 9 million things that you can charge on the HSA. So keep all your receipts and then down the road start paying yourself back.
- [24:28]
A
I think this is a superpower account and after we take our 401k match, I would be strongly encourage folks to contribute heavily to the hsa. Maybe max this out entirely before going to the next retirement accounts. It can essentially operate as a retirement account like a 401k but it's much better than that because all of the medical expenses come out tax free. But again that power, the superpower of this, of this account account, it's arguably the best account, even if you are disorganized. But if you are very organized and just file away every receipt you have for medical expenses, it's arguably the way, way more powerful than the other other retirement accounts because it goes in tax free, it grows tax free and it can be distributed tax free. But, and I would also encourage you keep those receipts for your health insurance premiums too, if you pay them, because I believe that that's legislative choice, that those can't be reimbursed by the hsa. And one day that may change and that may be another, yet another way to get money out of these accounts at a really tax advantaged way. So that's not current policy today. There's no plans to change that. But who knows what's going to happen in 10, 20, 30 years?
- [25:31]
B
That's a good point, Scott. I should go back and find all of my receipts for my premiums as well.
- [25:36]
A
Okay, next up, we're going to talk about college savings. One of the household specific goals here is to save for college. We believe that that should be a secondary goal for this household. A primary objective has got to be the retirement savings and emergency reserve on track. Right. There's no point in Hatton having a big college fund if we're going to have a crisis that's going to disrupt the family lifestyle on the way to children going into college. I would much rather see this household being on track to retire than having college fully funded. Right. We can borrow for college. We can find other opportunities to fund college like attending state school or attending community college and amassing a lot of credits before transferring to a full four year college in many cases. But we cannot catch up to retirement if we run out of time at that point. So I think it's really important to prioritize retirement first. However, this household has discussed their desire to fully fund retirement once they start hitting their 15% household savings target for retirement. I'd be fine with this household then beginning to save a little bit per child for college. And a good starting point for that might be 100 to $300 per month, month per child going into an account like a 529 plan. If you're going to start doing that when your children are young, the advantage of the 529 plan is greatest because the gains can be distributed tax free for qualified educational expenses like college education.
- [26:56]
B
But not only college education, Scott. You can use this for primary and secondary education as well.
- [27:01]
A
Walk us through what else you can use this for.
- [27:03]
B
Well, you can Use it for any expense that is an educational expense like a computer or a dorm room. Or you decide that you want your child to go to a private grade school instead of the public grade school, you can use your 529 funds to pay for them to go to the private school.
- [27:19]
A
It looks like you can use 529Plan for up to $10,000 per year for private school tuition. That's another use case as well on that front. But if you're planning to send them to a very, very, very fancy private school, probably need something else on top of that. Probably not this household, though.
- [27:34]
B
Our family is not sending them there. Yes, our family is using the 529 plan to money for college.
- [27:41]
A
That's what we're doing as well. Okay, so we've got two kind of big decisions in this framework that this household needs to make, right? We've tried to give answers everywhere else. You know, we're going to invest in low cost index funds. We're going to save 15% for retirement, we're going to save for college after we save for retirement, for example. But this household does need to make two decisions here. And there's an argument that perpetually goes back and forth on these. On these decisions, we're going to give our opinion on the them. But we do need this household to actually make a thoughtful decision and align on it as a couple. The big decision this household has to make is around Roth versus traditional retirement contributions. So traditional retirement contributions typically defer taxes now. So you're going to not pay taxes today. They're going to grow pre tax. And when you go to withdraw the funds, you're going to pay tax at ordinary income rates when it comes out. The Roth is after tax contributions. So we're going to pay taxes today, federal income taxes, any state applicable state taxes. And then we'll put that money into a Roth IRA and it's going to grow tax free. And any gains on that money will come out after we hit a traditional retirement age and we won't have to pay taxes on that growth. And in this household in this situation, I would heavily bias this household towards the Roth side of the spectrum here in their retirement contributions. Because I believe that this household is, this household is going to be in the 12% federal tax bracket here in 2026 with this income after we account for things like the 32,200 standard deduction, a 401k contribution and match if that's available to them, and any HSA contributions, they're almost certainly going to be saving the rest of that at a 12% federal income tax bracket. And because this household is basically responsible and working hard, I think it's very likely that over the years they will slowly increase their income. Them to have a few years in the 22 or 24% or maybe even a higher tax bracket over the course of the next 20 or 30 years of their career. And at that time, I think that's a great time to switch over to the traditional contributions like a traditional 401k.
- [29:40]
B
I completely agree, Scott, and this is something that I wish I would have really considered back when I was contributing to a 401k, I was prioritizing reducing my taxable income in the moment without even considering what the tax brackets I was.
- [29:58]
A
And some of this is unknowable. What are future rates going to be? What's the future income situation for this household going to look like? So there's no right or wrong answer and you're doing just fine whichever way you pick. We're just going to bias you towards that Roth instead of the traditional here today. All right, number two, college funding philosophy. We kind of have three options here for college funding. One is to attempt to fully fund estimated college costs. So that means that we're going to save as if our children are going to attend a target school school that may be a state school, that may be a private school, that may be a very expensive elite private school. But we're going to pick that target and we're going to fully fund it. The second option is to partially fund some percentage like 50 or 75% of what we estimate those college costs are going to look like. And then option C is going to be to ignore college savings and fund retirement first for this household, I think I'm going to recommend that they really put their foot on the gas for retirement savings first rather than college. Even though college funding is a stated goal, they can borrow or otherwise find ways to creatively fund college. Colleges, not a known cost college. Again, you know, like we talked about. Their children may attend community college for a few years. Their children may get a scholarship. Their children may not go to college that may. Things may look different in 15, 20 years as things come up. But they only have one crack at retirement. They know they're going to need funds for retirement in order to live a comfortable life at age 65. So I would really only begin funding college. I would heavily bias this household to make the conscious decision not to fund college right now and really focus on retirement until they hit or Maybe even meaningfully exceed that 15% target and only then think about funding college once they're well, well on track or even ahead of their retirement goals. What do you think, Mindy?
- [31:45]
B
I think that's a great point, Scott. You can't borrow for your retirement, but you can borrow for your education. So absolutely, retirement first. When you are consistently hitting 15 to 20% of your savings, when you are consistently hitting 15 to 20% of YOUR income in your retirement savings, then you can start, and I would start low, I would start with the 100amonth per child and then see how that affects you, your retirement savings, see how that affects your spending, and then maybe ramp it up a little bit. But you've got a lot of time for kids who, I mean, these kids are young, who knows if they're even going to college.
- [32:20]
A
This is a decision that you have to make and it feels hard, right, like, like this is strategy, right? We are a household here. This is, this is a very basic personal finance challenge faced by 50 million American households. They're going, that are going through some version of this decision making process here. And we have finite resources and conflicting goals. Core strategy challenge that goes on. We can't balance across all of these things and get to our goals. We have to choose. And that is a good strategy. There are winners and there are losers. There are things that get done and there are things that don't get done in the context of a good strategy. And we are taking this situation, the conflicting goals, and saying, how are we going to prioritize? The priority is going to be take the 401k match max, the HSA, contribute after that to the Roth after we have our emergency fund and forego college savings until we're well on track to reach our retirement goals. And there's a cost there. We may pay more in taxes if we go to fund college here, but I think that what will happen for this household is they'll get that pattern of savings set and they'll get farther and farther ahead on their retirement savings and they'll have options when it comes time to pay for college as they go down this path. And I think that is the more realistic outcome and I think that's the risk of funding college. But not having those options present for retirement is greater for this particular household. That's a judgment call. That's where personal finance gets personal. But no matter what, if you were in a household like this, you are going to have a hard strategic choice about how to allocate your dollars towards conflicting goals.
- [33:51]
B
Scott, how are we going to advise these, this family to implement these, this strategy?
- [33:57]
A
Next up, we're going to talk about an implementation roadmap. The three phases that this household will likely go through as they implement this plan right, Those are going to be stability, building the retirement engine and layering in after they built the retirement engine, college savings, and building flexibility into their plan. Now, as the first step toward this plan, we're going to recommend that this household begin tracking their spending and net worth. This is a very basic first step. Let's go to build the retirement engine. You want to tell us what that is, Mindy?
- [34:26]
B
Yeah. This is phase two. After we have completed phase one of stabilizing the household told we are working on your retirement plans, we are looking to build up to the 15% of your income as retirement savings. We're prioritizing the Roth while we're still in the 10 to 12% tax bracket. We are maximizing our HSA if we have a high deductible health care plan and we are investing that balance for as many of those medical expenses expenses as we can while we're saving those receipts so that we can pull it out at a later date. And we're going to automate all of our contributions as much as we possibly can. The company sponsors the hsa. We're going to have that come out of the check before we even bring that rest of it home. We're going to try to remove every decision that we have to. So you're not making that should I contribute to my HSA account? Everybody month, you're making it once and then that decision's done.
- [35:25]
A
Then from there we'll move on to phase three. Once we are consistently saving 15% or ideally even a little bit more for retirement, we're going to make the decision about whether we're going to pivot to begin funding college that that 100 to $300 per month engine, and we're going to start layering in flexibility as the next phase. At this point, I believe this household may opt for a more aggressive financial plan once they get to this target and, and we'll be ready here at Biggerpockets money with that more aggressive plan that can make an early retirement or provide additional optionality there. Once they get to phase three and are sitting comfortably in it, choices begin to pivot a little bit there. But that's when at this point, we'll begin again contributing those 529 plan contributions. We'll consider a taxable brokerage and we're going to just guard against lifestyle creep. We're going to monitor our spending and make sure that the goalpost, the spending at least adjusted for inflation, have not moved materially so that we can continue to accumulate responsibly for retirement. So I think you're going to spend a year or two in phase one. You're going to transition to phase two pretty quickly if it's a top priority and you're going to sit there for a couple years and then phase three is going to come after three to five years and that's where you're going to sit for most of the rest of your career. If you're getting for a traditional retirement, if you follow a basic financial plan like this, this with discipline.
- [36:43]
B
I think that's right. Scott and I like that you shared how long they will be spending. We rattled these phases off because we already spent a lot of time discussing them. But this is not a, oh, you're there. Now you're, now you're onto the next phase. Now you're onto the next phase. It'll be a few years before you are able to get yourself into phase two, most likely. And that's okay. You're moving forward.
- [37:05]
A
So we've got our, our plan at a high level. Let's talk about investing here. We've already discussed this. We believe that low cost, broad based US Index funds is going to be the core of a portfolio like this. This is going to be widely agreed upon best practices among many of the people in the personal, but not all of the people in the personal finance community that you're going to get this. You're going to hear the same thing from Dave Ramsey. You're going to hear the same thing from the Bogleheads community. You're going to hear the same thing from Amit Sethi. You're going to hear the same thing from Choose Fi. All these folks are going to agree with this. Those funds, funds often are favored by like a company like Vanguard. So you might go found like VTI or VTSAX as tickers for the Vanguard Total Stock market index or Voo, for example, for the S&P 500 index. These are very similar decisions. And on our document here we've got a list of these types of examples of index funds that have these low fees. Now we also talk about funds, funds that come through a Fidelity or a Schwab. So when you go to your employer in this household and you're looking for an opportunity to invest in a low fee index fund, Vanguard may not be available because it's not available through your 401k plan. It may be an alternative like Fidelity's Total Stock Market Index Fund which might have a ticker like FSKAX or fzrox. There might be a Schwab Total Market Index Fund. So just know that we're looking for a low cost index fund that covers the total stock market or the US market or the S&P 500. These are all going to be very similarly performing items here. And the thing that will drive your wealth is not which of these funds you invest in, but that you are investing in a low fee, broad based index fund that generally has exposure to these areas. You may also want to add a little bit of total international stock market exposure and there are other tickers there as well. Again, again, these can get very confusing. There's a lot of naming conventions here. But if you go looking for these items, maybe you're using an AI or maybe reviewing this lightly with an hourly or advice only financial planner, you should be able to identify relatively close alternatives to the funds that are the favorites, the darlings of the personal finance world in Vanguard, for example, inside of your 401k, your HSA or your other retirement account investment fund offerings.
- [39:20]
B
Yep, I completely agree Scott. And this is the Financial Stability Framework which is available@biggerpocketsmoney.com resources. You will download a copy so that you can review it, make any notes you'd like. If you participated in our 31 day challenge, you can keep it in your challenge folder. This is a great thing to come back to over and over again as you are continuing down the plan.
- [39:44]
A
This advice is free only for this household. It's for entertainment purposes only and illustrative of course. But there is no, there's no email required. There is no, you know, sign up information or whatever. It's just download it and we will get feedback from this. So we might get challenges. We would evolve our opinion over the years or change it based on changing tax tax codes. There will also be a financial model that goes along with this, an Excel spreadsheet that models out, you know, the taxes this household will pay based on their state and all that kind of stuff that will also be available for free@biggerpocketsmoney.com resources and we'll update and modify those as well over the years to make sure that they are all updated and in tune and if anyone spots an error or anything like that as comes up from time to time. So those are free only resources for education and entertainment purposes only of course. But they also contain all of the things we talked about today and many examples of these funds. If you get confused or can't see an option to invest there, again, that is not investing advice. It's entertainment only. Only. But we do have it in there as an illustration.
- [40:41]
B
Let's talk about best practices. Scott.
- [40:43]
A
Okay, so coming, we're not going to spend too much time on this, but a good financial plan has a strategy like a diagnosis. What's going on here? We have a household, they're doing just fine, they need it. And then it has a guiding principle. They don't need to do anything crazy. They just need a basic structure following best practices to build wealth by retirement age. And then it has specific actions, right? What to save, what to invest, all that kind of stuff.
- [41:05]
B
Stuff.
- [41:06]
A
Another component of a good financial plan is a series of best practices that are common to most planning situations. Right? And so in this plan template, we've got a checklist here of, you know, 10 categories, maybe 25, 30 actions, right? And, and these, these are covering things you've got to do. They're a pain in the rear. You got to do them anyways. It's health insurance, right? What do I, am I enrolled in an employer plan? Do I have a plan that's HSA compatible? Am I making a smart choice on that? Do I have cash reserves that are enough to cover the annual out of pocket max and deductible if I need to get in that situation? Right. Then we've got to make decisions around life insurance, right? We recommend term life insurance, not whole life insurance or permanent life insurance products. What am I going to do about disability insurance, umbrella insurance? Do I have an estate plan in place? Where are my cash and liquidity controls? Like how do we agree as a household if we're going to spend large amounts of money on necessities and, or fun or entertainment or vacations, those kinds of things? What are we doing with our retirement accounts? Do we have that written down and the decision making process automated? What are we doing with our hsa? What are our debt controls that we're doing that we're putting in place here? What is the decision we've made with respect to education, planning, tax and compliance, hygiene? Do we have a process for filing our taxes every year? Probably this household is going to be fine with something like a turbo tax. There's not a lot of complexity here, but they want to make sure that they actually know what they're doing, doing and, or if they have some more complexity that gets layered in in future. Years that they've got a competent CPA in there. Do they understand marginal versus effective tax rates and why they're deciding on the Roth versus the traditional 401k and have that down? Right. There's a career component to this. Right. Do we have basic professional policies in place to make sure that we are on track for that next promotion or raise? Do we have our resume updated? We're ensuring that the household's going to earn market compensation for their skill set and what needs to be done to advance. And is there a basic cadence for reviewing our finances, like net worth, savings rate, all those kinds of things? We recommend a monthly money date and then an annual review once per year in a more formal capacity. And then last, I think is a really important one that's not covered in a lot of financial plans is this concept of alignment on lifestyle goals. Right. A good financial plan is engineered to get you to something you want out of life. And we have a template at BiggerPockets Money. Also at Resource is a goal setting template that you can do with your spouse that will help you kind of decide, if I was handed all the money I needed in the world right now, what would I actually live like, what did my ideal life look like? And that exercise is very freeing because a lot of cases it doesn't cost an insane amount, you know, hundreds of millions or tens of millions of dollars. You can live a wonderful life on 50, 70, 100, $150,000 a year. But if you design, you start out designing that right now, you may find ways to engineer getting to that point much, much faster. And your financial decision making will be reflective of those stated goals. So we've included that checklist here and what we think are a set of best practices and how they cascade from this specific households framework in the Financial Stability Framework, this financial plan template for the middle class. Again available@biggerpocketsmoney.com resources. So go download it. It's a Word document. You can use it for any purpose that is personal. Please just email us if you're going to reuse it for some commercial purpose. We'd like to give our written approval for that. But these are part of our mission to provide high quality financial planning resources for those who otherwise wouldn't be able to afford them or seek them out.
- [44:30]
B
Yep, you can find them@biggerpocketsmoney.com resources. And Scott said it's a Word document. It's also up there as a Google Doc in case you don't have Word.
- [44:38]
A
Yeah, you can make a copy of a Google Doc or you can download it as a a docx, which typically opens in Word, but we're trying to make them as free as possible. And sometimes, you know, you do need a Google account, you want the Google Doc or you do need some kind of software to open up the the Word Doc if you download it.
- [44:53]
B
All right, Scott, I think that we covered pretty much everything for our couple here who we didn't even name this time. These are the Smiths. The Smiths are a stable household, two young kids. They're young, they don't have plans to retire early. And this is the plan that we think will get them to traditional retirement. We would love to hear from you if we missed something, if we misspoke, please email mindy biggerpocketsmoney.com or Scott biggerpocketsmoney.com All right, Scott, should we get out of here?
- [45:23]
A
Let's do it.
- [45:24]
B
All right. That wraps up this episode of the BiggerPockets Money podcast. He is Scott Trench. I am Mindy Jensen saying peace out sprout.
- [45:31]
A
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- [46:31]
B
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