What is the 3 Bucket Strategy? (And How to Do It Right)

Summary

Money Guy Show Summary: "What is the 3 Bucket Strategy? (And How to Do It Right)"

Release Date: January 27, 2025
Hosts: Brian Preston and Bo Hanson

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Introduction

In this episode of the Money Guy Show, hosts Brian Preston and Bo Hanson delve into the intricacies of the 3 Bucket Strategy, a foundational element of their Financial Order of Operations. This strategy is designed to optimize wealth building by categorizing assets into distinct tax-efficient buckets, ultimately aiding listeners in achieving financial independence with minimized tax liabilities.

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Listener Question: Maxing Out Retirement Accounts

Timestamp: [00:06]

The episode begins with a listener named Skibidi posing a pertinent question:

"I am 27 and was wondering if I need to max out my 403B when I contribute more than 25% combined with other retirement accounts through the pension, Roth IRA, and brokerage. So if you hit that 25%, do I still need to max out with step six?"
— Skibidi [00:06]

Bo Hanson responds by emphasizing the importance of the financial order of operations, explaining that while maxing out accounts like the Roth IRA and HSA is crucial, reaching a 25% savings rate of gross income may suffice for transitioning to the next financial steps.

"You just have to reach 25% of your gross income... you can move on to step seven hyper accumulation."
— Bo Hanson [01:24]

Brian Preston adds a touch of humor to the discussion, ensuring the conversation remains engaging while addressing the complexities of retirement savings.

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Exploring the 3 Bucket Strategy

Timestamp: [13:39]

The core of the episode revolves around the 3 Bucket Strategy, which Bo Hanson meticulously outlines:

1. Tax-Deferred Bucket: Includes traditional 401(k)s, IRAs, and IRA rollovers.
2. Tax-Free Bucket: Comprises Roth IRAs, HSAs, and Roth 401(k)s.
3. After-Tax Bucket: Encompasses regular brokerage accounts where taxes are paid on growth and investments.

"If you can build up these three distinct tax buckets, when you get to financial independence, you can pick and choose where you pull your money from."
— Bo Hanson [14:15]

This segmentation allows for strategic withdrawals during retirement, optimizing tax obligations based on current income levels and tax environments.

Brian Preston reinforces the importance of each bucket:

"When you get to financial independence, you can pick and choose what taxes you pay."
— Brian Preston [15:25]

When to Move Beyond Target Date Funds

Timestamp: [13:39]

Bo Hanson addresses a follow-up question from a listener named Sam, who inquires about transitioning from target date funds to more diversified retirement accounts. He explains that while target date funds are excellent for simplifying investments with automatic asset allocation adjustments, the bucket strategy necessitates a more nuanced approach as one approaches financial independence.

"I think people have to answer two questions: How much can I save and when do I need the money?"
— Bo Hanson [14:17]

Brian Preston concurs, highlighting the balance between maintaining aggressive savings habits and strategically allocating assets to maximize tax efficiency.

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Financial Assistance vs. Financial Enablement

Timestamp: [20:10]

Joshen raises an insightful question about the difference between financial assistance and financial enablement. Bo Hanson elaborates by referencing the principles from "The Millionaire Next Door":

• Financial Assistance: Providing support in a way that encourages responsibility, such as holding a mortgage for a child with reasonable rates while ensuring they engage in earning and saving.

  "Financial assistance takes Place... but it's not going to be something where you don't also have to do hard work."
  — Bo Hanson [20:10]

• Financial Enablement: Offering unconditional financial gifts, such as purchasing luxury cars for teenagers, which can breed entitlement.

  "Enablement to me is giving only... Compare and contrast that to assistance."
  — Bo Hanson [23:42]

This distinction underscores the importance of fostering financial independence and responsibility in the next generation.

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Net Worth Statements: A Tool for Financial Clarity

Timestamp: [05:01]

The hosts encourage listeners to undertake net worth statements, highlighting their value in tracking financial progress over time.

"5 years from now... you will be blown away by the progress."
— Bo Hanson [05:01]

They provide resources such as the Money Guy Net Worth Tool available on their website, advocating for consistent financial assessment to inform and adjust strategies as needed.

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Home Buying Strategies: Balancing Down Payments and Investments

Timestamp: [25:36]

Listener Music 80s questions the balance between making a substantial down payment on a home versus continuing to invest and rent. Bo Hanson offers nuanced advice:

• Higher Down Payment (35-40%): May be necessary in high-cost areas to keep mortgage payments affordable, but it comes with an opportunity cost of reduced funds available for other investments.

  "You have to recognize that the ability to save up a 35 to 40% down payment is a noble goal. But there's going to be a cost of you not building and saving dollars for the future."
  — Bo Hanson [25:53]

• Opportunity Cost Consideration: Emphasizes the importance of prioritizing financial goals and understanding the trade-offs involved in significant financial decisions.

  "Money is nothing more than a tool that allows you to achieve your financial goals."
  — Bo Hanson [25:53]

The hosts stress the importance of aligning home buying decisions with broader financial plans to ensure long-term financial health.

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Practical Advice and Personal Anecdotes

Throughout the episode, Brian Preston and Bo Hanson share personal stories and practical tips to illustrate their points, making complex financial concepts relatable and actionable. For instance, Bo recounts his experience with tackling household tasks while completing his net worth statement, emphasizing the hands-on approach needed for effective financial management.

"There's something magical about being able to look back on this 10 years earlier..."
— Bo Hanson [09:05]

Additionally, they discuss the emotional and psychological aspects of financial planning, such as the satisfaction derived from disciplined saving and the pitfalls of entitlement resulting from financial enablement.

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Conclusion and Resources

As the episode concludes, the hosts reiterate the importance of the 3 Bucket Strategy and adherence to the Financial Order of Operations. They encourage listeners to utilize the resources available on their website, including the Net Worth Tool and Home Buying Checklist, to apply the discussed strategies effectively.

"If you haven't done your net worth yet, I would definitely go out there for our free net worth template or check out learn.moneyguy.com for our full net worth tool."
— Brian Preston [32:32]

Bo Hanson wraps up by highlighting upcoming content and reaffirming their commitment to helping listeners achieve financial independence through structured and informed financial planning.

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Key Takeaways

• 3 Bucket Strategy: Segregate assets into tax-deferred, tax-free, and after-tax buckets to optimize retirement withdrawals and minimize taxes.
• Financial Order of Operations: Prioritize saving at least 25% of gross income to transition through various financial stages effectively.
• Financial Assistance vs. Enablement: Encourage responsible financial support that fosters independence rather than breeding entitlement.
• Net Worth Statements: Regularly assess financial health to track progress and inform strategic decisions.
• Home Buying Considerations: Balance down payments with investment opportunities, considering opportunity costs and personal financial goals.

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Resources Mentioned

• Net Worth Tool: moneyguy.com/resources
• Home Buying Checklist: Available on the Money Guy website.
• Learn Money Guy: learn.moneyguy.com

For more insights and personalized financial strategies, visit the Money Guy Show website and explore their extensive library of resources.

Transcript

[Brian Preston]

All right, this next one is from skibidi. I am 27 and was wondering if I need to max out my 403B when I contribute more than 25% combined with other retirement accounts through the pension, Roth IRA and brokerage. So if you hit that 25%, do you still need to max out with step six?

[Bo Hanson]

So this is a great question and one we get asked all the time as it relates to the financial order of operations. People will say, hey, at my income level, when I calculate what 25% of my gross income is and I max out my Roth IRA at $7,000 and then I max out my HSA at it's not exactly half of the family. It's like 41 54,300 somewhere in that ballpark for a single individual. Once I do those two things, then I start putting money into my 401k. I hit 25% before I ever get to the $23,000 threshold. So what happens at that point? Do I still have to max out? Do I still have to in order for me to move from step six, max out retirement accounts to step seven hyper accumulation. If I hit 25%, can I then do that or do I have to max it out first?

[Unknown]

Yeah, you've heard me tell this story, but a lot of you are brand new, so you haven't heard us tell these stories. So it's important for me to make sure I share it. We were doing a speech to these engineers about the financial order of operations. I'll never forget, we had a young female engineer raise her hand and she goes, this seems cruel that I don't get to get to the goals, financial goals, like fund my kids, college and other things until I max out my, my 401k here at the employer, which at the time was like 21, 22,000, now it's 23,000. And we were like, yeah, you're exactly spot on. The financial order of operations is an all weather, all terrain vehicle because we have designed it to where to get from step six down to step seven and then move on to step eight. You just have to reach 25% of your gross income. Because we do realize some people are just going to be not their income's not going to be huge, but they're going to be very disciplined and they're going to be very efficient at saving money, but their income just isn't high enough. At the time, I think it was in the, somewhere in the 80,000 to 80 to $90,000. You're not going to Reach the point to where you're going to hit the annual funding threshold of the 401k. That's okay. You've still been so successful with saving. You can move on to step seven hyper accumulation. That's where you go. Start thinking about your three bucket STR strategy, how you're going to use the money in retirement and then even move on to step eight which are those prepaid future expenses or abundance goals. That's where you start thinking about the kids college. You've done the hard work. And also I want to give another big accommodation. Congratulations for somebody who makes under six figures, hits 25% huge. Do you realize that the discipline and effectiveness of that savings rate is incredible? And it's so incredible also you're going to be closer to the social safety net. So even this probably gets even frothier in the future because you Social Security and other things I get more nervous about. People who prescribe that, they think that they're financial mutants, but they make two, $300,000 a year and they're just not realizing just because you maxed out your $23,000 401k, 23 5, 235 this year, that's not enough to do. You need to be thinking about 25%. And the other way on that one is to go beyond just your 401k or your 403b. You need to be saving more. But for Skibidi boppity boo, this is definitely you're on the right path.

[Bo Hanson]

What's so funny is after you read the question, I thought you were going to pause on the name Brian. Are you okay? You got. Are you okay? After you went through that, you got lost in the name on that one too. I love it.

[Unknown]

You guys, y'all have to be careful. I really am a squirrel and when I see names like it. That's why I had to thank thank you content team for leaving the question up. Because all I could sit there, I was like, that's a Disney reference. I think it has to be a Disney because immediately when I see it, all I see is skippity boppity boo.

[Bo Hanson]

But it's not Skibidi, is it? It's Bippity boppity Boo. Because it's the bippity boppity botique is.

[Unknown]

Where you're going to mess up. Don't mess up my good time.

[Bo Hanson]

Okay, that's fine.

[Brian Preston]

You know, I was honestly a little disappointed that there wasn't a reaction, but that that was perfect.

[Bo Hanson]

He was saving it. He liked to say he likes to save the chat.

[Unknown]

No, here's what I'm like, poor, poor guys here. Everybody here who works, they know that I'm gonna put some weird thing in there just because my brain is just wired. But don't screw up the video, Brian. Just keep it in check. Be disciplined on this part too. So that was what?

[Brian Preston]

No, I love it. You know what I also love? Tell me that almost 70% of the livestream audience has done their net worth statement.

[Unknown]

Yes.

[Bo Hanson]

It's like Christmas morning. What's so funny is we have some folks here who said, hey, you know what? Hey, found the money guy show. I've started working at the firm and we did our first net worth statement this year and we're like, that is awesome. Let me tell you the really exciting part. Five years from now, after you've done this for a number of years, when you get to look back and see the progress and see how it changed and see how much ground you can cover just by solid, consistent decisions making and small tweaks, you will be blown away. I mean, I've been doing mine for, we're getting close to 20 years now, right? Like it's rapidly approaching the 20 year mark and it is so fun to look back and just see how that has changed over time. And so if you've not done it, we have a great free resource you can use. You can go to moneyguy.com resources or you can go check out our net worth tool that has a full dashboard that puts front and center all of those things that we tell you about. Okay, how are my tax buckets built up? What's my money? I multiplier score. How was my journey to abundance look? And you can actually track those things. So if you don't have a tool that you're using, I'd encourage you go to learn.moneyguy.com check out your tool for those 30% of you that have not done it yet.

[Unknown]

So Sunday I was like, you know what, I have to show everybody. We eat our own cooking here. So I get back in town on Thursday and then Friday I had to spend the whole day taking down Christmas decorations. Do you know how sad it is when you come back in town? And then, you know, it's so fun putting up Christmas decorations outside, but it took me a day and a half to take down all the stuff in the front yard.

[Bo Hanson]

You get that saddens you though.

[Unknown]

It's much more fun to put it up than it is to take it down. But. So that was Friday and Then half of Saturday was taking down all my yardscape for the neighbors. And every year, I think I'm going to dial it back. My wife is like, the neighbors are kind of counting on it. So I did that. So Sunday I told my wife, I was like, I have to. After lunch, I'll take, you know, my youngest daughter. We got to go to my office because I've got to get my net worth done. And I felt like it was the most on brand. We eat our own cooking. Because here, here, here's my Sunday. We're driving to the office. I pull into the UPS store, make an Amazon return. I'm like, yes. Got some money coming back on the credit card for the Amazon return. Then we pass by the thrift store, the Salvation Army I make. I have the whole back loaded up now, look, it'd been much more tax efficient if we'd have made this decision in December.

[Bo Hanson]

Sure.

[Unknown]

So I could have deducted it for 20, 24. But we cleaned out the garage so I could put the Christmas in some of it in the garage. By the way, I got overwhelmed by how bad the garage was that it still made it up in the attic. It didn't make it in the garage like I did.

[Bo Hanson]

So was your goal to keep the Christmas in the garage?

[Unknown]

Just the big yardscape stuff, the snowman that has the animation on it. It's just too big. And I'm getting too old to carry this thing upstairs. Going up and down, I'm like, thank goodness I'm in decent shape for my age. But I'm like, you know, and I won't even. I won't even get into the family discussions about why this thing is ridiculous that I'm carrying the attic. But. So we cle the garage out for partially. Not fully, but partially. So I pull in the Salvation army, make a big donation, got the tax thing. I'm like, check. And then I drive to the office and I do my net worst thing. I was like, this is the most money guide day. It's a good ever to do this. And it was just good. I mean, I should have had a blizzard or something to celebrate, but I.

[Bo Hanson]

But you're eating healthy right now, right?

[Unknown]

That New Year's resolution usurped that. But it's. Yeah, but it was. It was a good day. And I would encourage everybody do your net worth statement. Because I know the first year, especially if those of you who think it's going to be negative or pretty close to zero, you're like, why does it even matter? Do it. I'M just telling you that there is something magical about being able to look back on this 10 years earlier. I started when I was 31, but I have an associate here who's pretty close to my age. He started when he was in his early 20s. I'm thinking about E.B.

[Bo Hanson]

Yeah.

[Unknown]

And I'm jealous because, you know, do the behavior. And my wife and I now, we're talking all over social media. There's all this manifesting language. I don't believe in that stuff. But I will tell you what I do believe in is if you start doing exercises and creating these good habits, there's something affirming. It's not manifesting. It's you just waking up a part of your brain that believes where you want to be and seeing a dashboard of what you have and what you don't have or how much debt you've taken on. And it kind of turning into. Because you've woken something up, not because you just spoke a spell into existence. This can work for you, too. So go out there and do the net worth, and I think you'll be surprised at what it can do for you.

[Bo Hanson]

Love it.

[Brian Preston]

Love it. All right. I don't think I ever gave Skibidi a Tumblr. So Skibidi, if you would like a Tumblr, we're rusty. You can [e-mail] I think Rusty.

[Unknown]

I think chaos is what people seek.

[Brian Preston]

All right, this next question is from Sam. They say, can you tell?

[Unknown]

Thank you. Y'all chose an easy name. I can actually hear this question.

[Bo Hanson]

You know, the number one, like, comment I keep seeing that you're getting on the jacket. Major Thriller vibes.

[Brian Preston]

It really is.

[Bo Hanson]

And so here's what I did. I went and looked Michael Jackson's Thriller outfit.

[Unknown]

It was not actually Beat It Now. Michael Jackson just. We'll get back to Sam. But you guys are the Beat it jacket. But I'm old enough that these things were all. And they were at the treasure chest. I think I'm trying to remember what was the. What was the. The store at the mall that always had the Michael Jackson gear. They had the Z Cavaricci pants, too, but the beaded jacket had the metal on the shoulders. I thought that was the coolest thing ever. And then. Then you had the Thriller, which was the red with the black V that came down. All those things.

[Bo Hanson]

You did not have to look that up. You just pulled that out of the memory banks. Like, that's locked in.

[Unknown]

No, I mean, these are things that when I Was a kid walking around the mall, I was like, man, if I just had unlimited money. So own that now. I didn't own. It's just like I've told you guys, even this, this is actual members only. So I'm sure some private equity company bought this old dead brand and was like, hey, I bet there's some nostalgic people that will go buy this because they couldn't afford it when they were a kid. Because mine was like players club or something else. It was only the kids whose parents really loved them. That bottom members only. You know, all the rest of us poor kids had players club or member select or some other makeup.

[Bo Hanson]

Mostly members, not mostly members.

[Brian Preston]

When did you buy this jacket? Because I just assumed that you've had forever. Yeah.

[Bo Hanson]

Oh, you thought this was a vintage back from then.

[Brian Preston]

Oh, no, this new.

[Unknown]

This is. I went to a fundraiser two years ago at my daughter's school and it was 80s night and I decided to go all in on it. So I bought this jacket and then I bought some Air Jordans and I tried to make the Air Jordans work, but my feet are just too wide. I got big old duck feet and those Air Jordans. You know, Nike doesn't do Air Jordans and it's hard to get a wide. So I even bought a wide shoe extender. And I'm in there just cranking that thing trying to make this shoe comfortable and it just. It doesn't work. They're cool looking shoes though.

[Bo Hanson]

Just not wide enough.

[Unknown]

No, I'm in there just cranking on it and it just get my foot. My old duck feet don't work.

[Bo Hanson]

So, Sam, thank you for your question about was it beat it or was it thrill? Was that his question?

[Unknown]

By the way, this gets on the side. I always thought if I didn't grow up in a small southern town that couldn't afford to do school pools and stuff, I think I would have beaten my. I think I would have been the precursor to Michael Phelps.

[Bo Hanson]

Really.

[Unknown]

Well, think about my body. I have big old duck feet. I mean huge wide. I have to do the double wide feet. I have a long torso, not long legs. I have long torso. You realize for swimmers that's an actual good thing.

[Bo Hanson]

Listen, graduating.

[Unknown]

So if I wasn't just. And I was always in backyard, I was undefeated like all my buddies. I could swim faster than all of them. I think in another day, another time. Olympic swimmer.

[Bo Hanson]

Did you do swim team? Were you a swim. We were on the swim team.

[Unknown]

Did you not hear where I grew up? Swim team didn't exist back then. It was backyard. It was my buddies swimming, you know, in the backyard. And I was the fastest of them. But I have no idea if it is actually organized because South Atlanta, back in the 80s. Swim teams. Swim teams.

[Brian Preston]

All right, so Sam's question, Sorry, he says, can you talk about what the bucket strategy is and when we should start considering diversifying our retirement account to more than just target date funds?

[Unknown]

Oh, he's mixed up. There's a few things in there. It's pretty cool.

[Bo Hanson]

Those are two kind of questions. Let me talk about the bucket strategy, Brian. Then you can talk about when it makes sense to graduate from target dates. So when we talk about building towards financial independence, we like for you to do it in three distinct buckets. We want you to have your tax deferred bucket, that's like your 401ks or your regular IRAs, IRA rollovers. We like for you to have your tax free bucket, that's your Roth IRAs and your HSAs and Roth 401ks. And then we want you to have your after tax bucket that's just like your regular brokerage account that goes has after tax money and then you pay taxes as the money grows and as you invest those dollars. Well, if you can build up these three distinct tax buckets, when you get to financial independence, you get to pick and choose where you pull your money from. So you, if you're in a high interest rate environment, you might pull up to a certain threshold from your pre tax assets to trigger ordinary income. And then for the rest of your needs, you might pull from the Roth assets or from the after tax assets and you can literally manipulate the tax code to pay the tax that you want to pay. So we have a ton of clients who have large seven figure portfolios that have six figure retirement needs and incomes, and yet they pay the lowest tax bracket. They might be paying the 12% or 22% federal tax brackets because they built up their three buckets. And that's how we actually built the financial order of operations. If you follow it through, you will likely build up those three buckets so that when you get to financial independence, you can pick and choose what taxes you pay. That's what we talk about. We talk about the bucket strategy. Now the second part of the question that Sam had was, well, how do I know when to move away from targets? Because the bucket strategy even plays into that a little bit in terms of.

[Unknown]

Not just the way I'd phrase it, I would have flipped this question a little differently because Bucket straight. That is sexy stuff. I mean, if you think about that, you are sticking it to the man on an illegal way to minimize your taxes. That sounds so good. And it's the same way the sexy sizzle is also in, hey man, you realize that you can make so much money if you just invest in this one thing. And it can be crypto, it can be whatever the popular thing is of, of the moment. But the reality is, is in the beginning, your savings rate and the habit of actually starting to save and invest is more important than even where you put the money. You've got to get, you got to get the make wealth behaviors going and the habits going first before you get into maintaining and maximizing those things. So that's why we, we tell people and people get upset about this. I'm like, you know what, you need to listen, actually sit down, listen to kind of what we're sharing because this will make a lot more sense. What I like about index target retirement funds is they first of all are taking advantage of index funds which are low cost, they're super efficient and they capture what's going on with this awesome economy that is innovating and growing just naturally upon itself. Instead of you trying to choose the winners, you just choose. Yes, I want to be part of this excitement that's going on. The target retirement part of it is that it's helping you while you're young, be super aggressive. And then as you get a little bit older and your risk profile is changing, it's getting more and more conservative. It's handling the asset allocation for you. So really when you marry those two together, it's really, you have to answer two questions. How much can I save and when do I need the money? Then the rest, you don't have to get distracted. You don't have to focus or waste any mental horsepower on anything. But how do I save more into my investments and then get into the financial order of operations and getting to step seven hyper accumulation, which is where the bucket strategy really kind of comes into play. And that's kind of a great segue into taking on the rest of what Beau was talking about. I think that's when I think people kind of graduate out of index retirement funds. Because now you have to start thinking about, hey, I have, you know, a lot of bond funds that I don't like bonds. Even, even my mother in law who's in her 80s over Christmas break was like, why do I have bonds? And I was like, oh my gosh, bonds are not bad. They actually Let me show you what they've actually made you over the last few years. Just because you hear equity, equity, equity. And I love equities too, and they've.

[Bo Hanson]

Done really well over the past couple months.

[Unknown]

But I was like, you have to understand that everything has a place in your portfolio. And you're going to. When you get to a point where you're trying to maintain your wealth and even multiply your wealth, you will want to, because you. It's not just risk tolerance, it's risk capacity and the ability to recover. If markets came down, you're going to appreciate that you have some conservative holdings, but you want to make sure you put those conservative holdings in the right bucket to maximize the tax planning as well. And that's why step seven of the financial order of operations. All those things really kind of intersect nicely and will help you maximize your journey. But don't get the steps out of order. So many people are so drawn to the sexy sizzle that they skip steps and they never. They don't even get the make wealth and then reach the maintain. They just skipped it. They're already jumping into the risk aversion side of things without actually doing the make wealth phase.

[Bo Hanson]

That's great.

[Brian Preston]

So Joshen's question was, what's the difference between financial assistance and financial enablement? Also, I picked up Millionaire Mission for Christmas and I have been loving it. P.S. love the jacket.

[Unknown]

Oh, please don't stop. Let's just go ahead. I mean, thank God it's a Tumblr day. I'd feel really pressured to only give one Tumblr out to Josh.

[Bo Hanson]

And so, okay, so what's the difference in financial assistance and financial enablement? We know, you know, one of one of the formative books in our life was the Millionaire Next Door, and it talks about, you know, traits of millionaires. And one of the traits of millionaires is that not only did they not receive economic outpatient care from their parents, meaning their parents did not subsidize their lifestyle, they also raised kids who they did not have to provide economic outpatient care to. And for the quick, like Webster definition of economic outpatient care, it is a parent subsidizing the lifestyle decisions and choices of their child, meaning their child is able to live a lifestyle at a higher means than they would be able to otherwise on their own. That is different than parents who have had some success, had some wealth, done things right, creating an environment where their children can then also continue to benefit from those wise choices. We actually love seeing scenarios where financial assistance takes Place. I'll give you a great example. We have some wonderful clients we work with and their kids did great in college. They graduated with impressive degrees, they got great grades, they were working through college, saved up money for a down payment and they had done everything right. But when they came out of school was right after real estate prices had just gone through the roof. And also interest rates were like 7 and a half, 8%. And so the kids were like, man, I really want to buy a house, but I want to make a wise decision and I want to make sure that I keep it inside the realm of affordability. And I know that I need to at least put 3 to 5% down. And I can't have my mortgage payment exceed 25% of my monthly gross income. And if I try to go buy a house right now, I can't do that because of where interest rates are. Well, their parents said, hey, look, you've done everything right, you've done everything you're supposed to. And we are in the position, we're in the place where, hey, we're not going to just go buy a house for you, we're not going to do that. But what we will do is we'll hold the mortgage for you, we will be your mortgage holders and we're going to charge a reasonable mortgage rate, 4%, 5%, something that's historical average that you're still gonna have to do the hard work of going out and earning living and paying your mortgage and satisfying this. And we're gonna provide some assistance to utilize the resources that we have. But it's not going to be something where you don't also have to do hard work. I think that's a great example of financial assistance, not financial enablement. What would you add to that?

[Unknown]

I thought, look here, I immediately wrote this down and I think it works because we have assistance enablement. I think enablement is give only and let me give you an example. And we live in a very affluent area here and it drives me crazy when I see people give their 16, 17 year old kids really nice cars. That is enablement to me. Compare and contrast that to assistance, which is like my oldest daughter, her first car, she paid for half of it. You know, look, it was a lot of people said they didn't have all the safety features that brand new cars. And I guess you have to balance that. But it was teach with incentive, meaning that I said whatever you save up, I will match dollar for dollar to put in. It's the same thing with buying stuff for your kids. Enabling things versus giving and teaching with an incentive like Roth IRAs. When your kids start working, when they're 14, 15, 16 years of age and they get those first earned income dollars coming in their life, if you offer them a dollar for dollar match into a custodial Roth ira, what do you think that's doing? That's priming the pump of good behaviors. And that's why teach with incentive is a very valuable thing. That's assistance versus you just giving somebody something. And that I think that can breed entitlement, it can breed where you are. And we've talked about this as a hazard. Why I think kids who grow up in wealth, they need scarcity. I know that sounds mean to say that when you're poor. When you're poor, you get scarcity all you want. It's an all you can eat buffet of scarcity. So it creates some things inside of you that is discipline. It wakes up some things and that adversity is good for you. If you grow up in a where abundance is everywhere, sometimes that can. We've had people come in our life where they say my best years were the years I lived with my parents.

[Bo Hanson]

That is, it's been downhill, rake smart.

[Unknown]

If you're buying your kids a BMW when they're 17 years of age, where do they go from?

[Bo Hanson]

That's right.

[Unknown]

Whereas I think about my cruddy car, almost said a different word. My cruddy car when I was 16 that barely cranked. And then I got that first Mazda. And then I think about after I got married and we bought that Ford Explorer that was still used, but it was just nice. It had leather seats. And I was like, whoo, these. Now look, it hit 100,000 miles and the rear view mirror fell off. And there was all kind of other issues with it. But I remember the joy that buying and then my first real new car after I had built up enough assets in my 30s that I bought a brand new car that had all the chemical smells that I got to breathe in and probably take a few years off my life. But I loved it. That's this type of stuff I'm talking about is teach with assistance versus if you give them everything, I think you have to be careful that it becomes entitled or you're giving them the best years while they're younger. And maybe people are going to be bothered by this because I know a lot of my neighbors, they know what I do for a living. They don't listen to a word I say because they all buy their kids brand new cars. But here's the exception to the rule because you're like, how does this fit in? You got enablement, you got assistance, and I got enrichment. I do think memories over stuff. I think if you can take, if you are living in abundance, take your kids on trips, do things like that because I think that stuff is forever and it's actually enriching to do some memories over stuff. Those are the kind of balancing act I would give. But don't sleep on the fact that scarcity, if you grow up in abundance, is an important thing.

[Bo Hanson]

I love it.

[Brian Preston]

Joshen. If you would like a money guy Tumblr, you can email winneroneyguy.com all right, we've got a question from Music 80s.

[Unknown]

They came up with that. I wonder why.

[Brian Preston]

Very on theme for today. What are your thoughts on using a 35% to 40% down payment on a home to keep the mortgage affordable versus investing and continuing to rent? Homes are near $500,000 on average in my area.

[Bo Hanson]

Unfortunately, it may be necessary. We tell people that all the time. We get asked this all the time, hey, I live in a high cost of living area and if I do the 3 to 5% that you guys suggest when it comes to first time home purchases and I calculate what my mortgage payment and housing costs will be based on that 3 to 5% down payment, where interest rates are now, it's way more than 25% of my gross income. And unfortunately, a lot of times we have to say, well, there's a few things that you might have to do. Either you might have to have a larger down payment, you might have to figure out how you increase your income to be able to afford that mortgage, or you might have to be able to find a less expensive house. Well, one of the things, especially depending on the area you live, the only real lever that you can move is that down payment. So we see this all the time. Someone says, hey, three to five won't get it done, or even 10, 20 in this case, it sounds like maybe even 20% won't get it done. You might have to go to 35 or 40% to get it affordable. That may be what you have to do if homeownership is one of your top goals. Now, the thing that I would caution you on and the thing that I want to make sure you measure is what would be the opportunity cost of that decision. So this is where you have to do like some deep soul searching, say, okay, when I line up my financial priorities, how would I prioritize them? Is financial Independence. A top priority is home ownership. A top priority is staying in this location. A top priority is the school district a top priority, whatever the thing may be. And you have to recognize that the ability to save up a 35 to 40% down payment to be able to get into a home to afford the home is a noble goal. But there's going to be a cost of you not building and saving dollars for the future that might be helping you move towards financial independence. And you need to recognize that if I make the decision to do this, I may be sacrificing something on this side. And that's neither good nor bad, it's neither right nor wrong. Because money is nothing more than a tool that allows you to achieve your financial goals. But you just need to be very clear on what those ultimate financial goals are.

[Unknown]

I would encourage you, you need to go check out one of our resources, go to moneyguy.com resources and we have a home buying checklist because there's really a push pull system here. We came up with a 3 to 5% down payment just because we have a no hypocrite policy here. And I think about my first home purchase, I put down 3 to 5%. BO put down 3 to 5%. We went and asked all of our CPAs and CFPs on staff, the majority of them only put down 3 to 5% too. And we're like, well, why in the world are all the talking heads out there telling people to put down 20%? It's just not right. It's hypocritical. If this is not what's really going on in the world, we need to have a rule to explain that most people who are good with money actually are on their first house to get on the home ownership train are putting down smaller than 20% down payment. Now the caveat on that is this is why the home buying checklist will help. If you bought too big of a house and your monthly, if you take your mortgage payment plus the expenses on the house and it's blowing up your lifestyle. Where your house rich but life poor. You can't save for the future. You can't even go out and enjoy a meal for your anniversary or your birthday. You probably have done things wrong. So that's why you have to have system there that says okay, in addition to the down payment. What is this as a cost to my cash flow? And it's why it's 25%. Now I know those of you who live in high cost of living areas, I get it. If you don't have car payments, you don't have other debt. Maybe that gets pushed up a little bit higher because you're doing public transportation, other things. But for most people that is a good rule of thumb so that you just don't let your eyes get bigger than your wallet and what your wages and your income is actually going on. So that's why I say those two things work in conjecture, connection with each other. There are some people though, when you upgrade, you're realizing, hey, the 25% of my income is the restriction. And that's where I like people probably putting down a bigger down payment. As long as once again we come back to what do you do with your next dollar? That's more of a step 8 prepaid future expenses, abundance goals. Because now you're increasing your lifestyle for your benefit, not just to get on the train of homeownership. This is because you're saying, hey, I'm going to buy a house bigger than what my income can justify, so I might need to put down a bigger down payment. So that 25% restriction is keeping me in check. But I don't want you to not fund your Roth IRA. I don't want you funding your 401k because you have this house at all cost mentality. So that's why those things have to work in connection with each other. I just, it does break my heart to hear people who can't get into homes, even starter homes, are half a million dollars. That's why the 3 to 5%. And here's another guidance I would give you. I remember I worked with or she was a friend, a young attorney who was basing all of her decisions off of another financial person who was saying don't do this, don't do this. And I was like, you realize in the next three years your income is going to be up probably 50% more than it is today day. Make sure that yes, you need to be conservative in your planning but also take into account where you are in this journey. That's why we give you these no hypocrite policy rules so you can actually look at your life in full zoom out scope of where you're going now. Don't use that as well, I'm gonna go buy the $3 million house because I think down the road I'm gonna be making seven figure. No, that is not what I'm talking about. But I'm saying if you're a person, an engineer, if you're an accountant, if you're an attorney and you're basing all your numbers off of $65,000 a year, but in three years you could be making $110,000 a year. You do need to balance these things still work within the confines of the order financial order of operations as well as our housing checklist. But understand how all these things work together. Nobody ever explains the math and that's why we try to do the Money Guy show so that you can actually see how the mindset intersects with the financial math calculations that you're doing. That's great.

[Brian Preston]

Wonderful. All right. Thank you so much music 80s for your question. If you would like a Money Guy tumblr you can get [e-mail] and thank you so much to everybody for tuning in today. It was a great first stream back for the year. You can go to moneyguy.comresources/resources to find any of the resources that we talked about today. If you haven't done your net worth yet, I would definitely go out there for our free net worth template or check out learn.moneyguy.com for our full net worth tool where you can track it from year to year.

[Unknown]

Yeah, no, I love it. That's what I was going to tell everybody. Get out there. Make the most of 2025. This is also the great time to clean up 2024. You can still make those funding contributions for your health savings account, your Roth IRAs. Go check into those things because you have until April. This is a great time. Beginning of the year is a hot time of the year for us because we know a lot of New Year's resolutions and a lot of people are focusing on their finances and we're just happy to be here because there is a better way to do money. And that's why we love inviting people to come hang out with us every Tuesday at 10am and then check out all of our new content. We have new content coming out on Wednesdays. We have new content coming out on Fridays. We have we are loading you up because we are absolutely on fire and there's so many cool announcements that are coming out early February is going to be so exciting for a lot of our Money Guy family. I won't because they'll start hitting me and tackling me and not letting me say more. But this is going to be the year if you want to get your financial life in order, we got you covered. I'm your host Brian Preston. Mr. Bo Hanson for the rest of the content team Moneyguy team out the.

[Bo Hanson]

Moneyguy show is hosted by Brian Preston and Bo Hanson. Brian and Bo are partners with Abound 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.