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

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.