Bo (3:02)

Well, she is right. Basically she's just saying hey, if you prepay your mortgage you're going to pay less than interest. That is absolutely a fact. That's true. It's not uncommon for folks to do this. Either make extra principal payments or instead of paying monthly pay bi weekly. Those are prudent strategies for paying down your mortgage, paying off your loan more quickly. The question you have to ask for your on what my mortgage interest rate is, is that the best use of my money? If I have extra $600 a month I could put towards principal if I'm a young person, might those dollars be better used somewhere else in my financial.

Brian (3:34)

Yeah, primary mortgages don't have prepayment penalties on them, so I don't have any problem. And there's actually a lot of research shows like people who have seven figure of assets, even if they took a 15 year or 30 year mortgage, more than likely they're going to pay the house off within 10 years. But the problem I have with this is it's all about why we wrote the financial order of operation is that you have to get your money in the right order. Should you prepay your mortgage when you're, you know, say you're in your early 30s and you have a 4 1/2% mortgage and you haven't funded your Roth IRA? I think that's possible. Yep. Should you prepay your mortgage when you're sitting on student loan debt, it's at seven and a quarter. Meanwhile your mortgage debts at four and a half percent. Just like people never remember, Please excuse my dear aunt Sally. When they're doing math, there's an order of operations with your money as well. And I want to make sure you do it in that right order. And that's why make sure you follow our financial order of operations to kind of make sure you know what to do with your next dollar. Most Americans have been told that the 401k is the number one way to save for retirement. But it's a total lie.

Parent Investor (4:39)

The 401k has proven time and time.

Brian (4:41)

Again to produce horrible results. We have the track record guys, we have the data. What more proof do you need? Receipts, proof, timeline.

Financial Expert 2 (4:50)

Now people are contributing less and less.

Bo (4:52)

So there's very few scenarios in which.

Brian (4:53)

A 401k can actually produce the results that you want.

Bo (4:56)

We have the data, guys, we're just.

Brian (4:58)

Not going to share it. We were going to show you the data.

Bo (5:00)

We have the data. We have an entire wealth management firm of people that have built wealth by using their employer sponsored retirement account, by using their 401k, by using their 403, by using their 457 to truly build wealth and builders financial independence.

Brian (5:14)

Well, I thought he did a, he did a sleight of hand thing there as he said we're going to show you the data. And then he talked about the behavior if people are contributing less and less. Yeah, we have a problem in America where people are contributing less and less to their future. But it's not necessarily the tool isn't functional and even can work for you. Especially if you have an employer that gives you 50 cents on the dollar or dollar for dollar match. That's like a 50% to 100% guaranteed rate of return. That is very productive. Just make sure you get in there and take advantage of that. Unfortunately, all the research shows 30 to 40% of people, depending upon which study, whether it's Vanguard or some of these others don't even get the full match. So it's not, it's a behavioral problem. It's not necessarily something that he as he showed can even give us in the details in the data.

Parent Investor (6:00)

Little guy turned three months today and already has a net worth of $2,607. Pretty impressive. Very first thing that we did was we opened up a 529 plan when we found out my wife was pregnant. And then we started taking $100 per month. Putting it into that plan means that 12 months later we put in $1200. But the day that he was born we also put in $500 and that plan has gained $170 just in interest for a grand total of $1,870. Now, when he turns 18, he's on track to have a grand total of $71,000, which he can use to pay for college tax free. But similar to how we put $500 in the day he was born, on every birthday we're going to contribute $1,000 means that he'll actually have probably closer to 116,000. The second thing that we did was we opened up a taxable brokerage account. Now, we had to wait until he was born because you need a Social Security number to open this account. But again, on the day that he was born, we put $500 into this account. And since then, we've continued to take $75 per month and contribute to that account. We've also gotten a whopping $12 just in interest. There's currently $737 in this account. Doing all this means that at the age of 18, he's on track to have about $50,000. But our plan is, at age 18, to stop contributing to that 529 plan and use that extra money to bump up how much we put towards that brokerage account. And if we do this, by the time he turns 25, assuming that he doesn't touch that money, he would have $118,000 that he can use to buy his first home.

Brian (7:42)

The only thing we're gonna say, this is all still step 8 financial order of operations. Make sure you're putting your oxygen mask on before you help out the kids. I gotta believe, though, based upon the way that he's talking about the money and doing things. I bet the Roth IRA is fully funded in this household.

Bo (7:58)

What that means for them is they're likely saving 25% of their gross income before they're starting to save for their son. But so long as you're doing that and you're following that correct order. This is chef's kiss. I think this is fantastic.

Brian (8:09)

Oh, man. Let's talk about. We got good penmanship, good handwriting. Left handed. He's left handed, too.

Bo (8:14)

That's your favorite part.

Brian (8:16)

Bravo. You know, my only complaint was when I'm picking on you for the color of the sheet that you're using and the fact that your go wishes was all in one sheet. We're nitpicking at this point. You're extremely good at investing, Stash.

Financial Expert 2 (8:29)

How shall I be thinking about investing?

Brian (8:30)

Should I be investing?

Financial Educator (8:32)

There's something known as a rule of 72. It tells us how long it takes money to double. And it's a kind of a mathematical hack. So, for example, if I'm going to get a 7% return, and I do 72 divided by 7, that's approximately 10. And at the 7% return, it's going to take 10 years for the money to double. 7% compounded will take 10 years. If I have a 10% return, it will take 7 years. 72 divided by 10 is 7. It's very important to know how long money takes to double, because then we can start doing a lot of math in our heads.

Bo (9:05)

This is great, and this is true, and this is accurate math. But what most people leave off when they talk about the rule of 72 is it assumes how long money takes to double in isolation. But when it comes to building wealth and actually making your money double, do you realize even if you're earning a 7% rate of return or 10% rate of return, if you can continue to add to the pot and you can put money in all along, your money will actually double much, much, much more quickly than what The Rule of 72 describes.

Brian (9:32)

Slay. Slay. No, you're. You're spot on.

Bo (9:35)

Slay.

Brian (9:36)

I've just. Look, I've heard my own college daughter say that. And then I had. You know how you go to a restaurant and you say, hey, can you take our picture? And the person who took our picture this weekend, she said, slay, too. I was like, this must be what the cool kids are saying. So I felt like it fit here. Did I not use it properly?

Bo (9:51)

No, no, you nailed it. Slay.

Brian (9:54)

Slay.

Wealth Advisor (9:54)

How do you buy a Rolls Royce for free? The big mistake is when people say, I want to take $500,000 and for it, People come to me, and this happens often, and tell me, I bought a car with cash. It literally makes me want to cry. Dollars make dollars to spend. If you have $5 million, you put the $5 million either in a stock portfolio, which creates between 8 and 10% annually, historically, or you can put it in a high interest account, which right now is paying about 5%. So $5 million at zero risk guaranteed. 5% interest is $250,000 a year in interest, and you still have the principal. That means you're making over $20,000 a month in interest and you still have 1% of the principal. So now you take a line of credit out against your $5 million that's earning $250,000 a year. You write a check for the rolls Royce at $500,000, and your money just.

Brian (10:46)

Paid for your role. But he didn't tell you how much you're paying on the car because it's going to be a high interest dollars.

Bo (10:52)

A month in the bank.

Wealth Advisor (10:53)

Now you want to talk about being a G, that's how you're a G.

Bo (10:56)

It just breaks my heart when people are so bad with math.

Financial Expert 2 (10:59)

Everyone in this room is now dumber.

Financial Expert 1 (11:02)

For having listened to it.

Bo (11:03)

When you go lever against your portfolio and you can borrow against your portfolio, you can collateralize it. It's not a free lunch. You don't get to borrow against yourself or nothing. There's going to be some interest associated with you borrowing. And what's likely going to happen is you have to pay interest on that loan. And there's a really good chance if you're earning 5% risk free based on the interest that you receive in your savings account, the interest is going to be charged on that collateralized loan to go acquire that car is going to be greater than 5%. You're going to be losing money on that interest rate arbitrage and the price of the car. The value of that asset just goes down and down and down and down. I don't like this as an idea.

Brian (11:43)

The loan is going to be somewhere between probably 8 to 11%. He's already disclosed he was making 5% on the $5 million. The only reason that you could do the straight is because you had exactly what this comment said, $5 million. There's a, there's a big X that's missing here in the equation. This is like a magic trick. He just did a bunch of misdirection. But if you're actually good with money and you know how math works, you realize he said a whole lot of nothing there except for it shows that he's, he's basically, he said it in the first sentence is that you have money so you can spend. And that's the problem I think with most people is that they look at the money they're building from consumption standpoint instead of thinking about. And this is something why I think I'm a financial mutant early on I caught on is that it's owning stuff that can create income and replace me having to work with my time. That's the real value. It's not actually creating money so I can go spend, go own a bunch of stuff that creates and works harder than you can. Then you, your brain, your back, your hands, that's when you can actually live like no one else.

Personal Finance Learner (12:48)

I started learning about personal finance and the recurring theme was you should have emergency fund for these things that happen and when I started to build up that emergency fund, the first thing that I used it for, and it was such a relief, was when I went down to my basement and there was water all over the floor and my water heater was leaking. And the beauty of that was it wasn't catastrophic because I had money already set aside. And that was again, probably mid, late 30s, when I was like, oh, this, that's what this is for.

Brian (13:19)

Yeah, it's called peace of mind.

Bo (13:21)

That's literally a tale of two people. If you're someone who doesn't have an emergency fund and that unknown, unknown happens, that water heater happens exactly what he said. You go into credit card debt, you have to get on a payment plan. It literally can derail your entire financial life. Or you have that fully funded emergency fund. And when the emergency happens, you just write a check and you deal with it. And it doesn't, does not take you off course. That's the very reason why we want people to have an emergency fund.

Brian (13:45)

I love that it keeps you from having to make those desperate decisions with desperate answers. Because you know what people do? They end up going and getting in credit card debt. They end up doing payday loans. They do stuff that goes to nowhere. The fact that he had emergency reserves, yeah, it stunk that he went downstairs and he saw a puddle of water. But at the end of the day, he had it covered and he didn't lose any sleep over it.

Financial Expert 2 (14:07)

Stop contributing to a Roth until you've maxed your 401k.

Bo (14:11)

Loud noises first.

Financial Expert 2 (14:13)

The Roth option, where you pay taxes first, then invest the remainder. Individual living in New York making 100,000, their effective tax rate is 28%. $10,000 gets taxed down to 7,200. You invest that for 30 years at an assumed 8% return. The result, 72,000, which can be removed tax free. Now, the first 401k, same $10,000 invested without taxes touching it on the way in, compounding for 30 years at that same 8% return, result, $100,600. Now, when you remove money from that 401k, you have to pay income tax. But the average person's income drops by 25% in retirement. And that creates a disproportionate drop in effective tax rate, dropping from 28% all the way down to 16% after tax. That 100,600 becomes 84 and a half grand. Boom. Pay $12,000 more by maxing your 401k. As you can see, the math is crystal clear.

Bo (15:15)

Well, your Math was crystal murky.

Brian (15:17)

Boom roasted.

Bo (15:18)

When it comes to making this decision, you don't look at your effective tax rate, you look at your marginal tax rates. But he is correct. If you are in a higher marginal tax bracket while you're or while you're working, it is more advantageous to make pre tax contributions to get that front end tax deduction. Because likely when you retire, when you pull the money out, you'll be in a lower tax situation. But if you're someone who's in a lower income tax situation, it's likely that your tax rate's going to go up. You'd be better served to make Roth contributions. So yes, he's absolutely right. Tax arbitrage does exist in terms of which makes more sense between doing pre tax or Roth contributions. But in my mind, Brian, I don't think it's an either or.

Brian (15:58)

The heavy. What was doing the heavy lift? Whenever I see math examples, I'm always like, okay, especially when somebody is trying to use it in a persuasive way. I'm like, what's the number here that's doing the heavy lifting? And it's the $100,000 of income. Because he's trying to create an either or answer on $100,000. And I think the answer is actually probably an and.

Bo (16:16)

That's right.

Brian (16:16)

I'm going to encourage you, yes, do your employer 401k, especially up to the employer match. And if you're into higher tax brackets like this, especially in a high tax state, for sure, do traditional. But then also and do a Roth IRA as well, because you can actually do both. It's not an either or. You can do both at the same time. If somebody came right out of college and was making $50,000 a year, that's going to be a completely different threshold. And his tax example kind of falls apart just because the tax rate numbers are going to be much, much lower. And you're quickly see, hey, maybe that Roth IRA where I control where the money goes, what the money's invested in. It's not so bad either.

Bo (16:53)

Brian. There were a lot of half truths and almost rights that I think there's a lot of that in the financial world. There's a lot of stuff that gets really, really close to being right, but it's not quite there. But we believe there's a better way to do money. It's why we have tons of free resources out@moneyguy.com resources so you can understand how to do the best with your dollars, how to do money better go check it out. Moneyguy.com resources no doubt.

Brian (17:19)

Go out there and check it out. We have tons, literally the free stuff Beau's talking about. We also have a bunch of calculators. We have a bunch of cool things that you in real time can see what your money can and cannot do. But then it also will let you see, hey, if I can accelerate this and create a level of success, what's the next step? We got you covered on that, too, so go check it out. MoneyGuy.com I'm your host, Brian, joined by Mr. Bo, Money Guy team out.