← Money Guy Show
Money Guy Show
How To Win Financially Based On Your Income
00:39:35
Money Guy Show | How To Win Financially
Loading summary
Transcript87 lines
- [00:01]
Brian Preston
I see you.
- [00:02]
Disney Advertiser
Fire and Ash is now streaming on Disney. It's the film critics are calling the best avatar yet. A true epic and completely jaw dropping.
- [00:13]
Nordstrom Rack Advertiser
This is the only pure thing in this world.
- [00:16]
Disney Advertiser
Return to Pandora on Disney.
- [00:18]
Brian Preston
It will be an adventure for the whole fam.
- [00:20]
Disney Advertiser
And watch the Oscar winning phenomenon at home.
- [00:22]
Bo Hansen
This is sick.
- [00:27]
Disney Advertiser
Fire and Ash now streaming on Disney. Rated PG 13.
- [00:31]
Bo Hansen
So good, so good, so good.
- [00:33]
Nordstrom Rack Advertiser
New summer arrivals are at Nordstrom Rack stores now. Get ready to save big with up to 60% off brands like Rag and Bone, Levi's, Adidas and free people. Join the NordicLub to unlock exclusive discounts. Shop new arrivals first and more. Plus buy online and pick up at your favorite rack store for free. Great brands, great prices. That's why you rack.
- [00:57]
Brian Preston
How do you win with money based on your income? Good news. You're about to find out.
- [01:02]
Bo Hansen
Brian, I am so excited for this one because today we're going to take you through a wide range of incomes to show you how to make the most out of that money and what you can do to level up on your way to your great big beautiful tomorrow.
- [01:15]
Brian Preston
I'm Brian, he's Bo, and we're financial advisors here to help you build wealth at any income level. And with that, jump right in.
- [01:30]
Google Chrome Advertiser
Brian.
- [01:30]
Bo Hansen
We really do have this belief that no matter how your journey starts, it does not define how it ends. We believe that wealth building is attainable to everyone. Obviously, we talk about having a bigger shovel and a larger income will help, but we genuinely believe that at various incomes, you can build wealth. And so that's exactly what we're going to go through today. But before we dive in, we do want to give you like one quick disclaimer because we wanted to lay this out so it could be as valuable for you as possible. But all of these numbers we're going to walk through, they're going to vary depending on a number of things, like your state income tax, what your withholding rates are, your specific spin rates. We just want to give you a general idea at these different incomes what that could look like so that you could master that income to build wealth.
- [02:21]
Brian Preston
All right, with that, Bo, I can't wait to see what we did with earning $50,000 a year.
- [02:28]
Bo Hansen
Yeah. So here's the layout. If you're someone who makes $50,000 a year, let's level set. At first, that means that on an hourly basis, if you were paid by the hour, that's the equivalent of about $24 per hour. If you are an individual that falls into that income threshold that puts you in the 35th percentile of income earners amongst individuals, or if that's your household income, $50,000 a year. That puts you in the 30th percentile of income of household earners in this country.
- [02:59]
Brian Preston
Yeah. And take home pay. If you're trying to figure out what is actually coming in and so that you can spend, it's around $3,700 a month. And that's assuming you're married, filing jointly, 2026 tax rules, standard deductions, W2 wages, no state local taxes.
- [03:16]
Bo Hansen
And so if we're going to think about someone who is at that income level, about $3,700, we're going to try to figure out how do we compartmentalize how much they have for needs, how much they have for wants and how much they should be saving. And based on that, we also want to arrive at, okay, where would be a reasonable emergency fund for someone in that realm? And so if you make $50,000 a year, again, depending on your spending, you're probably going to need an emergency fund somewhere around 10,000 to $20,000. That's going to represent for you and your family somewhere between three months to six months of living expenses in liquid cash readily available.
- [03:56]
Brian Preston
Now here's where I think the, the magic is about to happen is because we need to talk about at $50,000, we're realistic and understand that a lot of your money is going to budget, be budgeted towards living expenses.
- [04:11]
Bo Hansen
That's right towards your needs.
- [04:12]
Brian Preston
And so we understand, look, when we've covered this type of content in the past, we've done what's called a 50, 30, 20 split, which is 50% needs, 30%, 20% savings. But it seems a little tone deaf if we tried to say you should have 20% savings rate on a $50,000 income. So we've actually adjusted this. Bo, what did we do to make this a little more realistic?
- [04:35]
Bo Hansen
Yeah, we wanted to be as close to reality as possible. And again, disclaimer here. We recognize that making $50,000 in a high cost of living area like, like Los Angeles is very different than making $50,000 in a lower cost of living area like southern Georgia. But on average, if we're going to think about how to break out how to budget that $3700 of take home pay that you're receiving, what it likely might look like is probably 75% of that amount would be going towards needs that'd be about $2800 a month. About 15% would go towards wants or a little over $550 and you would likely be able to save around 10% of the net. Or we like to think about gross savings rate. That would be a 9% gross savings rate on $50,000 a year. I think on average across the country that 75, 15, 10 would likely work in most areas in the country.
- [05:32]
Brian Preston
Yeah. Now you know, a lot of, because this is the first category we're setting up that that needs is doing a lot of the heavy lifting. This is covering your shelter, your food and those type of things. More of the wants is really kind of that buffer of unexpected things that are showing up every month. And then I think it's important because when we say 10% savings on this slide, we're talking about net, whereas everybody's like, wait a minute, money guy doesn't do net. So what does this mean? You're exactly right. If you're paying attention, we gross this up on our next slide to 10% net for somebody at $50,000 is actually 9% gross savings rate.
- [06:09]
Bo Hansen
So if we assume that this is where you are, are you able to build wealth? Obviously a vast majority of your pay is going to towards the needs and then also going towards the wants and those unexpected expenses. So if all you're able to save was $370 per month, can you actually build wealth? What we found is for a 20 year old, if you were able to start saving and investing and you just saved that $370 every month for the entirety of your working career over 45 years, by the time that you got to retirement, you would still be able to build up a portfolio of nearly $2 million. It came in at just over $1.95 million.
- [06:50]
Brian Preston
You know, all the inflation trolls are going to be, I hope they celebrate this because we put this in there because everybody's always like, make sure you're honest with everybody. And everybody knows 1.9 close to $2 million. If you just applied the 4% safe withdrawal rule, that's close to $80,000 a year. That sounds great, but, but we wanted to be honest and we said let's pull this back and make it in today's dollars, meaning inflation adjusted. And what's, what's interesting is that that means that turns out close to $2 million for the 20 year old really is the retirement or expense replacement amount of close to $21,000.
- [07:29]
Bo Hansen
And remember, this is a person who is making $50,000 a year. It's not replacing a huge portion of their income. If you're a 25 year old that just started saving, we believe that you could build a portfolio to about 1.3 million. And if you don't start saving until 30 years old and you have a $50,000 annual salary, saving 9% of your gross income or 10% of the net would get you to just a touch under $850,000 in your portfolio by the time you retire.
- [07:58]
Brian Preston
You know one of the things that I think makes the magic with way we do things here at the Money Guy show is we always say if you're a single person who makes a under $100,000, I want you to count your employer match. If you're a married couple and you make more or less than $200,000, count your employer match. And people say, wow, why do you have different rules based upon income? It's because the lower your income, the closer you are to the social safety net. And we know one of the biggest things that helps the majority of Americans who are definitely in the lower income side of things, is Social Security. And if you did the research, you'd find out that Social Security benefit typically is around $2,081 a month, which comes out to be right under $25,000 a year for people receive it. So if you add that to these projected retirement incomes that are brought to present dollars, you quickly see now the income replacement. Man, this is pretty incredible because you did a lot with a little.
- [08:58]
Bo Hansen
Yeah, said a little bit differently. A 20 year old just saving 9% of their GR income. But a $50,000 income with Social Security would still have the opportunity to replace 91% of their pre retirement income by the time that they get to retirement. 25 year old is still able to replace 82% once you factor in Social Security. And even if you don't start until 30 years old and you're saving 10% of your net take home pay by the time you get to retirement. If you factor in Social Security based on the average or the median Social Security income in this country, you would still be able to replace 74% of your pre retirement income at retirement.
- [09:38]
Brian Preston
And I'll echo something. It's ridiculous to echo something I just said three minutes ago or two minutes ago. But remember, if you make at this level of income, you get to count your employer's money. So there's a chance that there are people here that are going to save 6% because they have a 50 cent per dollar contribution on their 401k get 3% for their employer. So we're actually building an Entire successful retirement off of just funding your 401k guys, do you see how powerful your army of dollars can be if you're just early and often with the savings. A lot of you are watching this and you're like, well, what do I need to be saving based upon my income? We would encourage you go moneyguy.com resources we actually have a great deliverable. You can actually go look at your age. When you want to retire with will give you the answer on how much you should be saving and investing.
- [10:30]
Bo Hansen
All right, Brian, so we walked through the numbers of what it could look like building wealth at a $50,000 income. But what's the mindset? What are the behavioral things that you need to be thinking about in order to get ahead? And this is not going to be incredibly surprising. The very first thing at this income level, we want you to be intentional. You've likely already discovered there's not a ton of margin. There's not a lot of wiggle room in the system. So that means you're, you have to be very, very intentional with every dollar. Understand where it's going and don't let your dollars be wasted.
- [11:02]
Brian Preston
Well, that, yeah, every dollar has to have a plan. As I just shared with you guys, you can find success with as little as 6% savings rate. So if you're one of these people, yes, you don't make a lot of money. Maybe you're just starting out and adulting is kicking your rear. Don't let that be a cope that you say, I, I just can't save. I'll put it off until I'm 30. I'll put it off until I'm 40. No, do a little bit. I don't care if it's just you setting up $1,000 a year. Do something so that you can start rolling that boulder down the hill and create success for your future self.
- [11:38]
Bo Hansen
And then we want you to avoid the mindless spending. It's not at this income level, you don't have the luxury of not thinking through your consumption and thinking through your purchases. And as you're thinking through those, we want to make sure that you are aware that compound interest can be your absolute best ally. Unless you let it turn into your fiercest adversary and you start racking up consumer debt and you start charging balances on credit cards. Because if you do that, you begin digging a hole that is going to be incredibly difficult to get out of at this income.
- [12:11]
Brian Preston
And to give you context on what that looks like is think about the average credit card monthly payment is around $181 a month.
- [12:19]
Bo Hansen
We just said we wanted you to save in $370. And most people have half that going towards credit card payments.
- [12:24]
Brian Preston
So you can quickly see that if you're not paying your credit card off every month, you probably should be in no go land with credit cards because you don't want to have your future self and your future success being gutted by bad consumption decisions.
- [12:39]
Bo Hansen
And the last thing, when we think about what we want your mindset to be and how we want you to approach building wealth at this income level, is be patient. Recognize that at a lower income, at $50,000 a year, it's likely going to take longer to hit some of your goals. It might take longer to build up that emergency fund to pay off that high interest debt to get to the point to where you're maxing out your Roth ira. That's okay if you start early enough and you give it time. Time can overcome the lack of margin, the lacks of lack of flexibility in your system. But you have to be patient. It's not something that's going to happen overnight. And that's okay.
- [13:19]
Brian Preston
Yeah. When you're young, early and often, you're literally a billionaire of time. And I know it can feel like, hey, how is this actually going to make a difference? And that's why, once Again, go to moneyguy.com resources play around with our wealth multiplier tool so you can keep yourself motivated or even print this thing out. You hear about people who try to get their beach pods ready or they put a swimsuit up next to the mirror. You can do the exact same thing with our wealth multiplier. If you need to keep perspective on how every dollar has value, this is something that will help you stick with it so you can be patient.
- [13:52]
Bo Hansen
All right, we're talking about how to win financially at different incomes. We just had $50,000. Now let's move up. Talking about $100,000 a year. If you're earning $100,000 a year, that's the equivalent of about $48 per hour from an individual earner standpoint. If you're earning that, if you're in six figure land, you are in the 71st percentile of individual income earners or as a household. If you earn 100,000, you are in the 57th percentile of household income earners.
- [14:20]
Brian Preston
Yeah, and this is one of those, the take home pay. When you look at that, it comes out to be around $7,100 a month. And then your Emergency fund. Because this is somewhere between that three to six month of your expenses. Well, you know, this is kind of little difference with income and expenses. Pay attention to the expense side of things. But it's going to probably end up somewhere between 20 to 40 thousand dollars of emergency reserves.
- [14:41]
Bo Hansen
Now remember the, the conventional wisdom when it comes to how you budget and how you break out where your dollars go is that the ideal mix often would be 50% towards needs and 30% towards wants and 20% towards savings. And I think once you get to a hundred thousand dollars of income, that becomes much more realistic. Because if you have $7100 of net take home pay coming your way, you could have 50% of that going towards your needs. That's a little over $3,500 a month going towards groceries and rent and utilities and gas and those sorts of things. You could have 30% going towards wants, where it probably now is a mix of some of the things you actually do want, but also planning for those unknown contingencies. And then at this level, you likely could save 20% of that net amount or about $1,400 a month, which actually works out to a 17% gross income savings rate.
- [15:38]
Brian Preston
And it's worth repeating, you know, at this level of income, this is where most people. This is going to be like a joint income.
- [15:43]
Bo Hansen
Sure.
- [15:44]
Brian Preston
That's just well below the $200,000 threshold that we talk about. So count that employer money. So if you think about 17% of your gross income savings rate, where 3 to 6% of that very well could be coming from your employer, many of you are going to find success or potential success for saving as little as 11% of your take home pay, that is doable, guys.
- [16:05]
Bo Hansen
All right, so if we're going to have $1,400 a month going towards building to future financial independence, what does that look like? Well, for a 25 year old who has 40 years to have those dollars working that level of savings, that 17% gross savings rate could likely turn into a $5 million portfolio. If we back that back in today's dollars, we think that that would generate, assuming a 4% safe withdrawal rate, about $61,000 a year in today's dollars of income in perpetuity.
- [16:39]
Brian Preston
Yeah. And once again, you add the Social Security, it comes out to be close to $25,000. You know, we just did this across all age categories, all income levels. If you. Obviously the more you make, the more you'll receive. But we want to keep this conservative 86% income replacement a Lot of times you know your expenses are going to be less than your income. So this is even more conservative. Meaning that that ro that early and often starting at 25 is going to be rewarded in the long term.
- [17:08]
Bo Hansen
For someone who starts at 30, they have the ability saving that 17% gross savings rate to get to a portfolio of just under $3.3 million. That portfolio at age 65 could likely produce a retirement income of around $46,000 in today's dollars. Add Social Security to that and you're able to replace 71% of your pre retirement income. Even if you didn't start saving and
- [17:33]
Brian Preston
building until age 30 and then 35 year olds. Remember this means you had nothing when you started. A lot of you guys started earlier, you found this, but we assumed starting at zero at age 35 even then you would build up to $2.1 million in today's dollars. That's worth about $35,000 a year of expense replacement. And then you can add on to Social Security still a 60% income replacement pretty close to being acceptable since you're not going to likely be paying as much in taxes or have the debt in retirement.
- [18:07]
Bo Hansen
Yeah, what this shows me is that even for someone who gets a late start, even if someone didn't figure it out, if you can get to the point to where you have a healthy six figure $100,000 household income, retiring on a normal retirement timeline is still possible. Being able to retire at age 65, draw Social Security and have a comfortable life relative to what your pre retirement income was is still possible without having to have some crazy off the wall savings rate and having a super super scarce mindset trying to build up because
- [18:39]
Brian Preston
we, we do a lot of by age shows but a lot of people will see, you know when they see our 20 and 25 year olds. But wait a minute, I'm in my 30s. I've already missed the opportunity because these guys of course if I had an extra 10 years it would do a lot of stuff. But I miss study and play come
- [18:57]
Windows 11 Advertiser
together on a Windows 11 PC and for a limited time college students get
- [19:02]
Bo Hansen
the best of both worlds.
- [19:04]
Windows 11 Advertiser
Get the unreal college deal. Everything you need to study and play with select Windows 11 PCs. Eligible students get a year of Microsoft 365 Premium and a year of Xbox game. Pass ultimate with a custom color Xbox wireless controller. Learn more@windows.com studentoffer while supplies last ends June 30th terms at aka mscollegepc.
- [19:25]
Google Chrome Advertiser
This episode is brought to you by Google Chrome. You Think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a 50 page restoration block. Or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it, ready to make anything online make sense. There's no place like Chrome. Check responses set up required compatibility and
- [19:47]
Brian Preston
availability various 18 plus that this shows it's okay. We know that the typical American doesn't discover investing until they're about in their mid-30s. And I'm here to show you. That's why we love showing you the numbers. You can do this even if you didn't figure this out until your 30s. Now, yes, it's a little bit harder, but you can make success happen by harnessing the power of compounding growth.
- [20:12]
Bo Hansen
Now, what should your mindset look like? How should you think about money? What are the steps you should take to get ahead at $100,000 of income? Well, you really need to know where your money is going. You likely have more margin, more flexibility than you had at a $50,000 income, but not a whole lot more. You still don't have the ability to be super frivolous or super, super loose. So even if you're not budgeting and you don't know exactly how much is going to go categorically into every place, you likely should be tracking your spending because you want to make sure that there aren't any leaks in your financial ship that you're unaware of.
- [20:49]
Brian Preston
Yeah, and making everything automatic for the people through automation is going to protect you because it really does. And I know I repeat this all the time, but it's worth saying is if when you automate your life, you make the good habits that much easier because it's just a set and forget. It also makes the bad habits where you maybe if you have money in the bank, it just tends to disappear that much harder because there's already a purpose and a plan for every dollar in your army of dollar bills.
- [21:16]
Bo Hansen
Now, we want you to automate. We want all your financial independence money to happen automatically. You pay yourself first and you spend what's left over. But there's a good chance at $100,000 of income, there's still not quite enough margin to hit some of those intermediate goals or hit some of those unknown unknowns that come your way. So this is still probably an income where sinking funds will be incredibly valuable. Hey, we know that we're going to have to replace the car, so we're going to have a sinking fund or hey, we know we're going to have some home maintenance. We're going to create a sinking fund so that we can fund those goals as they come. And you don't let those unknown unknowns derail your financial.
- [21:50]
Brian Preston
Yeah, I like, I like having the one offs covered because that's the stuff that just like when we were designing the financial order of operations, we didn't want you to get derailed with the, the stuff that happens on a Tuesday afternoon, like your hot water heater blows up or you. But there's also things we can plan for like car replacement, like annual property taxes and so forth. Create a sinking fund so it's just not a surprise and it doesn't disrupt your financial life.
- [22:15]
Bo Hansen
All right, bro, we're talking again about how to win financially at different incomes. We've covered 50,000, we've covered 100,000. Now let's go to $150,000 of annual income. Now we're starting to get up there in the higher echelons because if you're someone who makes $150,000 a year, that's an hourly pay equivalent of about $72 per hour as a single individual. If you're earning this, you would be in the 85th percentile of income earners in this country. If that's your household income at $150,000, that puts you in the 73rd percentile of income earners in this country. This is a meaningful shovel at this level.
- [22:54]
Brian Preston
And the take home, you cross $10,000 a month of take home pay. Guys, that is like when I talk to retirees that are successful, like their aspirational retirement is like, man, if I could just have 10 grand coming in in retirement. So you now cross that threshold with your earnings, take home earnings, that's something definitely to be celebrated. But because you've had success, it's also increasing what those emergency funds should look like. And you're probably going to need to have 30 to 60 thousand dollars just to make sure something doesn't pop up and derail your financial life.
- [23:26]
Bo Hansen
Now, again, we're trying to think about this realistically because if your income goes up and now you have more money on a take home basis coming in than you did previously, you probably are going to have a little bit more margin. And likely if you're controlling your lifestyle and not allowing your lifestyle to creep too far, your needs will likely represent a lower part of your income than they did at lower income. So when we think about a structure of what this could look like if you have $10,000 a month net coming in, it could probably look like something around 40% going towards needs. That's about 4,000 or $4,100 a month, about 30% going towards wants or maybe even some of those abundance goals you may have. That's about $3,000 a month. And then at this level, we want you to be saving 30% of your net. Or if you think about the gross amount, that puts you right at a 24% savings rate or just over $3,000 a month. That's going towards building future financial independence.
- [24:23]
Brian Preston
People, if you've watched this whole show, you're probably starting to catch on, man. Those taxes actually have a pretty good impact on the difference between net and gross. And we understand that there's definitely an impact to those things. And that's why you see 30%. You're like, wow, that's a really. That's a third of what I got coming in. But in reality, if you take it out to gross, it's right under that 25%. We talk about 24%. Especially this level of income, I believe is definitely doable.
- [24:50]
Bo Hansen
Now we want it, again to be realistic. We recognize a lot of people might not have the opportunity to build up to this level of income really early on. This might not be the income that someone in their early 20s or mid-20s might be making. We said, okay, what if you're someone who maybe you haven't made all of the perfect financial decisions, but you've been advancing in your career to the point to where you get to age 35, and at 35, you finally hit this income milestone. What does it look like if you begin saving at that point and again, you're going to save that 24% of your gross income a little over $3,000 a month? Well, even someone who doesn't start until age 35 just saving that $3,000 a month can still build by retirement a portfolio of over four and a half million dollars. If we assume a 4% safe withdrawal rate, that would generate about $75,000 a year in today's dollars. You add to that Social Security, on average of about $25,000 a year, and you're still at a 67% income replacement ratio even if you didn't start your journey until age 35.
- [25:58]
Brian Preston
Well, that's what a lot of people now you're like, whoa, I'm seeing. It's a magical thing how you guys, if you go to that moneyguy.com resources that deliverable. We have with how much you should save. It's amazing the intersection of the 25% we tell people we base that off. We know the typical American waits until they're in their mid-30s to start saving and investing. And that's why you see that intersection point. It's not a surprise if we know that it's all built off of 35 of Discover Age of Discovery, that for somebody who's in their 40s, even though you can build up a portfolio of close to $3 million, it's still only going to have the replacement ratio of about $56,000. Adsol Security $81,000. That's only 54%. I say only because it's still. That's good. But you're probably a little nervous about that. We want to go ahead and be honest with you and say, look, if you want to get this up to 60% or greater, your savings rate is probably going of your gross income is not going to be 24%, it's going to be closer to 29% because you did defer starting to save and invest and let your army of dollars build until you're 40 years of age.
- [27:05]
Bo Hansen
Yeah, we say it all the time. If you can start early, it's a little bit easier, but the longer you wait, the more difficult it is. If you're that 45 year old, we're showing you that saving 24% of your gross income will likely not get you to a normal retirement timeline. If you want to retire at a normal timeline with a 60% income replacement, your savings rate at 45 would likely need to be closer to 40, 40% than 25%. The earlier you can figure this out, the sooner you can begin putting these steps in place, the easier the journey will be. That's why we say all the time the absolute best time to start saving and investing was yesterday, which by default makes today the second best.
- [27:46]
Brian Preston
Yeah, I'll make it in kind of a meaty way. Since you like to work out and stuff. Is you, you do it early, you get to do it light. If you do it late, it's going to be heavy. No, it doesn't work, does it?
- [27:58]
Bo Hansen
You do it right, you do it light.
- [28:00]
Brian Preston
There we go.
- [28:00]
Bo Hansen
You do it wrong, you do it long.
- [28:02]
Brian Preston
This is why your biceps look the way they do and why my biceps look the way they do.
- [28:06]
Bo Hansen
So what do you need to be thinking about if you're at this income, how do you make sure that you win financially at 150,000? Well, I do think that now you're no longer in that scarcity place where oh man, I can't make these decisions. There's a lot of financial decisions that you could make. You have to have the discipline not to make those. And you have to make sure that you're keeping an eye out for lifestyle creep. Getting way out ahead of.
- [28:29]
Brian Preston
Yeah. And by the way, a lot of you are like, well how do I protect myself from lifestyle creep? Because I start having some success. I feel like everything's defer, defer, defer. No, we're realize we like like what we call the 6040 split. When you get pay raises, if you're trying to aspire to get to that 25% savings and investment rate, take 60% of your pay raise, let it go towards your savings and investment rate and then still let 40% go towards lifestyle. There's nothing wrong with you increasing the life you live, but do it in a disciplined way where we do have a plan of action that's going to create your army of dollar bills reaching that healthy savings and investment rate as soon as possible.
- [29:07]
Bo Hansen
Another thing that's likely happening at this income threshold is there's a good chance you're moving through the financial order route. Brian, hold the thing up for me. You're likely moving into some of the latter steps of the financial order of operations. And what you're beginning to notice is that man, I've got different accounts that I am starting to fund. Not only am I doing the roth and the HSAs or not only am I putting money in my 401k or employer sponsored account, but I've also got this third bucket, I've got this after tax bucket and I recognize that all of these buckets I have are unique and distinct. And we want you to recognize that at this income level it may make sense to start paying attention to that because the types of assets and the types of holdings that you hold inside of your pre tax bucket might need to look different than the types of assets or holdings you hold in your tax free bucket. And what you hold in your after tax bucket may want to look a little bit different than what you hold in your 401k because each one of those buckets is taxed and treated differently. So the types of assets, the types of investments and the way that you build those ought to be thought out as such.
- [30:12]
Brian Preston
Well, it's one of those things where I think when you're young, your savings rate is even more important than your investments. But I think definitely once you get beyond the three bucket strategy and when you're going to start using this money, you need to figure out how your portfolio allocation intersects with these three buckets. So that's why this is definitely when you can have the desire to keep your life as simple as possible. But success is going to create additional
- [30:37]
Bo Hansen
complexity and that only continues to increase as your income increases. Because we also want to talk about what's it take or what does it look like to financially win at $300,000 now, important disclaimer here, Brian. I imagine a lot of people that are going to hear this and be like, oh well, you can't lose at $300,000 of income. Sure, sure, you, you can't screw that up. And yet we know that there are a number of households that make over $500,000 a year that still claim to be living paycheck to paycheck. They are not able to actually build wealth and save for the future. So if you are not disciplined even at higher income levels, you can find yourself in a sour financial position. So what does it look like at a $300,000 income? Well, from an hourly pay standpoint, that's about $144 an hour. If you are an individual earning $300,000 a year, you are now in the 97th percentile of income earners. You are in the top echelon of individual income earners. Even if your household income is $300,000, you are now in the 93rd percentile, the top 10% of all income earning households in this country.
- [31:46]
Brian Preston
Well, I mean your take home pay is 20, close to $20,000 a month. Reminds me of that. I think it was Margin Call where in that movie talks about how there's a trader on there who's talking about how he spends a million dollars a year and after he talked about private school, the mortgage, the car and look, discipline. You said it already, Bo. If you don't have discipline when you don't make a lot of money and then you don't have discipline when you make a lot of money, you'd be surprised to find out that you pretty much end up in the same place. Money having more money is only an amplifier of the bad decisions you were making when you didn't have money. It doesn't mean that this is an excuse. We're definitely not making excuses for these people. I don't understand how anybody who makes this level doesn't have success. But yet we see it day after day. And a lot of the research, a lot of the stats, you don't want to end up like this. Because it also there's more responsibility. An emergency fund when you make this level of income somewhere between 50 to $100,000. And if you already don't have a good savings rate with 300,000, you probably don't have an emergency fund. And that's going to exasperate. Yes, big shovel, poor discipline.
- [32:49]
Bo Hansen
Now here's one of the benefits. Here's one of the good things that happens at this level of income. We want you saving 25% of your gross income for your future self. Well, if you have a large income and you're able to hit that 25% threshold, it does allow you to begin focusing on some of the other areas in your life. Maybe you want to increase your quote unquote needs or maybe you want to increase your wants. So from a budgetary standpoint, if you have $20,000 a month coming in, it might look something like 30% going towards needs or about $5,800 a month. 38, almost 40% going towards wants or discretionary spend. That's like $7,400 a month. And if you can have a 32% net savings rate, that's going to be the equivalent of a 25% gross savings rate. That's about $6,240. That's going to work building towards your future financial independence.
- [33:42]
Brian Preston
Yeah. So this is probably the time to let's, let's see how these numbers play out. A 25%. Look, we're realistic. If you make $300,000 a year, you probably, you're not a 20 year old, you're not a 25 year old. This is something you're going to be in your more closer to those peak earning years of your 40s. And that's why look, it's amazing for a 35 year old there are, there's a number of you who reach out. By the way, we love it when you are young and you have huge shovels because we can help you maximize that opportunity because it is an opportunity to potentially grow your money up to $9.3 million. Now it humbles you when you realize if you take into account inflation, that's only retirement income around $153,000, about half
- [34:27]
Bo Hansen
of what you are making while you're working.
- [34:29]
Brian Preston
I would also, since you're so beyond the social safety net, I don't, we probably should have even taken this column out. But I'll put it in there. It even with Social Security, you're only at a 59% income replacement. Now more than likely taxes are Big. The savings rate you have is big. This should be okay. But it does get scary for the 40 something. The 45 year old who did not start saving early and often when they're in their 20s and 30s.
- [34:56]
Bo Hansen
If you weren't a disciplined saver before you got to this income, it's going to take some discipline and some effort to make up for lost time. Because what usually happens is people's income grows to a certain level and so too does their lifestyle. And so the lifestyle they need their pot of money to replace also increases. So if you're a 40 year old and you want to be able to have a 60% income replacement ratio by the time that you get to retirement, but you've not been saving consistently up until 40, your savings rate doesn't need to stop at 25%, it needs to go to 34% in order to replace 60%. If you wait until 45, you have to have nearly a 50% savings rate just to be able to replace 60% of your pre retirement income. If you have not been building and have not built up to this point, I think you should rethink. Okay, what kind of lifestyle am I trying to replicate in retirement now that I have this huge shovel, is it going to allow me to create a more modest lifestyle that I can sustain for the remainder of my financial life?
- [36:03]
Brian Preston
But let's be realistic. This is a financial show. And for financial mutants who are watching this and have incomes of $300,000, they were, they, they didn't make the mistake of not doing anything. They actually want to know what tools can I use to maximize this moment? And that's where you probably should consider advanced portfolio strategies. The mega backdoor Roth conversions. If you want to know who the apex predator of tax free growth is, this is something to pay attention to. We like bunch charitable giving because we think once you're in this level of success and you're not in the make wealth, you're even beyond the maintain wealth, you're even in the multiply. Let's be charitable with that money. But let's do it in a smart way to maximize the opportunity. And we kind of covered this even at 150, but it's worth repeating at $300,000. BO Portfolio Location the three bucket strategies and the allocation definitely have an impact.
- [36:56]
Bo Hansen
And you may even be thinking about other types of investments or other types of diversity. If you have been building and been saving up this point, perhaps that's real estate, perhaps it's alternative investments, but only if you're in the right step of the financial order of operations. Only if you've made it out to step eight of the financial order of operations. I hope what you've seen here is that it is not impossible to build wealth at any income level. But at all income levels, Whether it be $50,000 a year or $300,000 a year, it does require discipline and it does require the ability to defer gratification, live on less than you make today so that you really can build for that great big beautiful tomorrow.
- [37:38]
Brian Preston
Yeah, it's that margin. It's that discipline that a lot of people struggle with. But a lot of people also who are watching this are going to be like, man, you guys are describing the situation I'm in. And I actually definitely kind of resemble that person who chose to keep my life as simple as possible. But it seems like the more success I have, the more complexity just shows up. And now you're at the point of success. You're like, I don't want to make a mistake with this money. I know how hard it was to build this wealth. So I don't know what my blind spots are. I don't know what I don't know. That's why we work with clients all across the country. We'll leave the porch light on for you. We invite you take the relationship to the next level. I'm your host, Brian, joined by Mr. Bo Money got team Out.
- [38:23]
Show Disclaimer Narrator
The Money Guy show is hosted by Brian Preston and Bo Hansen. Brian and Bo are partners with a bound wealth management. Abound Wealth Management is a registered investment advisory firm regulated by the securities and Exchange Commission. In accordance and compliance with the securities laws and regulations, Abound Wealth Management does not render or offer to render personalized investment or tax advice through the Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment or legal advice. All investments involve a degree of risk, including the risk of loss.
- [38:59]
Carrington College Advertiser
Your next chapter in healthcare starts at Carrington College's School of Nursing in Portland. Join us for our open house on Tuesday, January 13th from 4 to 7pm you'll tour our campus, see live demos, meet instructors and learn about our Associate Degree in Nursing program that prepares you to become a registered nurse. Take the first step toward your nursing career. Save your spot now at Carrington Edu Events. For information on program outcomes, visit carrington. Edu Sci.