Master Your Finances In 35 Minutes

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1:01And it might not be as hard as you're thinking. Brian, I am so excited about this because we love helping people do money better. But depending on where you're at, what you need may be different. So we're going to look at four main personal finance categories. We'll meet you where you're at and start with the beginner's level, then move all the way up to mastery. So with that, let's jump right in.

1:30All right, Brian, so let's start at the very beginning with a category that I think a lot of people get wrong or maybe misunderstand, and that's debt. Oh, man, don't get us started on debt. This is one where it really does create a bridge to nowhere. I feel like the typical American is that they have this lifestyle that they think that they should have, but they can't actually afford it. So what do they do? They fall into the trap of using debt. Yeah, but what you do is as you begin to advance in your financial life, you recognize that debt is not just something that can help you float your lifestyle.

2:07It actually can be a tool. So we want to talk about, depending on where you are in your journey, how to understand what a beginner understands about debt, what someone who's at the advanced level understands about debt, and then someone who's at the mastery level understands. And this is what someone at the very beginning level of understanding around debt would believe. they would believe that debt is dangerous and in fact that is true brian some would even say it's chainsaw dangerous yeah i think that i consider debt in the beginning to be a wealth trap and let me elaborate what i mean by that is that we and we'll cover it in greater detail we talk about the three ingredients to wealth creation if you're thinking about consumer debt credit card debt and other traps that most people fall into it works against two of those key ingredients if you think about the fact that because you feel like sometimes when you have this easy access to credit cards, you don't have to be disciplined.

3:00There's one ingredient that we're totally working against. The second thing is because you're not disciplined, you might accelerate purchases that you're just not ready and you can't afford. And the problem I have is that it works against that all powerful time ingredient because this is, guys, you realize all the time that you're trying to get back out of that hole paying down or paying off the credit cards, you're missing out on all the wealth multiplier opportunities of that wealth to grow. So what do you need to do? Well, at the beginning stage, you just need to put up barriers. You need to recognize that there are things you can do in your life that will prevent you from using debt the wrong way.

3:37A great one is an emergency fund. If you're following the financial order of operations and you get to step four, you know that we want you to have three to six months of living expenses in a fully funded emergency fund so that you don't have to use debt as a crutch. And we also want to make sure that you have appropriate risk management metrics in place that you are insured against the risks that you can insure against so that if one of those unknown unknowns comes your way, you do not have to rely on debt to be the thing that gets you out of the tough spot. Yeah, well done. I think this is the thing we're giving the American public a lot of credit with this, but I do think it's an important barrier.

4:15Emergency reserves, as well as having good insurance protection, is going to keep you from making those desperate decisions where the first place people typically go is the credit card debt. And we know that that is the trap that will keep you from becoming wealthy. Okay, so the beginner level folks believe that debt is dangerous. But as you again progress in your financial journey and you reach the sort of advanced level of understanding, you begin to recognize that debt in and of itself, it may actually be a necessary evil. Well, yeah, look, I think about myself. I didn't get a credit card when I was in college because I was scared to death of getting a credit card and what that meant.

4:50But I did find out as soon as I graduated college, I quickly realized I needed a car. And I didn't have cash to buy a car, so I had to finance a car. So there is a point where you realize, okay, now we have to graduate from beginner to where debt is a trap, it's dangerous. Now I've got to realize, how do I work with car loans? How do I deal with student loans? How do I deal with a mortgage in the future? Debt is going to be something that's probably going to be in my life. Yeah, those three things that you just mentioned are exactly that. For most folks, the three largest, most expensive things you'll ever buy.

5:22Your education, if you're having to fund it yourself. Your automobile is the thing that gets you to and from your job, as well as your home. It's the thing that literally provides shelter over your head. So if you want to master the advanced level of understanding about debt, you need to know the limits. And knowing the limits is understanding where your boundaries are around these necessary purchases that you have to make. Well, that's why I feel like the typical American is like, well, if you give me a little, give me a lot. And that's what we know. You need to know the limits, and that's why we've tried to give you guidelines for all these big life decisions.

5:56Let's jump right in on the first ones. I told you, car purchase. I had to go buy a car so I could get to my J-O-B and start this wealth-building process. Because in the beginning, I didn't have money, but I had time and I had my skill set, but I needed to get to the job so that I could start creating that margin that created the wealth in the background. And 23.8 is going to keep you safe because here's what 23.8 does for you. We're going to require that you put down 20 % on this new car purchase. We're going to make sure that you don't finance it longer than three years. You know what that's going to do?

6:29That's going to protect you from buying too much car because you can't truly afford it. And then we want to make sure that your monthly payments do not exceed 8 % of your gross income. Now, Bo, there's some overlying things that we put with this too, is that this is never luxury cars. And this is also one of those things where I don't want your car payment exceeding your monthly investments. If you can do this when it comes to buying a car, you're going to keep yourself inside the realm of where you need to be. Well, student loans are no different. That's why for most folks graduating, we have what we call the first year financing rule.

7:04And basically this is what it says. You should not incur more student loan debt than you anticipate your first year starting salary to be. Now, there are obviously some caveats if you're someone who's in a vocation that has an extended education period, or maybe you're in a higher earning career like the medical field or something like that. But for the majority of college enrollees, you want to make sure that the amount of debt you incur over your two years, three years, four years of college does not exceed what you anticipate making in your very first year out in the workforce. Well, that helps us on making sure we have the good debt of education.

7:39It doesn't run away from us. Let's talk about mortgages because this is another big life decision. Now we, unlike others, we haven't had to change our rules. We've been very consistent about this. I want you to, if you don't go out to moneyguy.com slash resources and look at our home buying checklist, I think you're missing out because one of the first things that's going to tell you to do is that you've got to be in this house for at least five to seven years. And sometimes with these interest rates and some of the other things going on in the market. It might even be beyond that, though. Yeah, absolutely.

8:09In addition to having the right time horizon, we say that when it comes to buying your first house, if you can't put down 20%, that's okay. It's not a must on your first time home purchase. But if you decide to put down less than 20%, one of the things you have to make sure of is that the total amount of your monthly payment, the total amount that you're paying on housing cannot exceed 25 % of your gross income. If you find that your housing costs are above that, you're going too far out on the risk spectrum, you likely are buying more house than you can afford. So if you can go out and check out the home buying checklist, you can use the home buying calculator on the website, make sure you're making this decision well, because once you figure this out in the advanced stage, then you get to move on to mastery.

8:54And mastery is kind of exciting because remember in the beginning you recognize that debt was dangerous and then as you advance you begin to believe okay well debt's just a necessary evil that has to be there but at the mastery level you begin to understand that debt is actually a tool now don't mishear us we still say that debt is chainsaw dangerous i mean it is one of those things where even myself i'm every time i sign the dotted line for new loan i'm scared about it i lose a little sleep about it. And I think that's a healthy thing because it's just like the chainsaw. If you're using this tool and you're not scared to death, you're probably using it wrong.

9:33And what do we mean by that? Is that debt, just like a chainsaw, it's going to make, you know, if you're like, think about we do commercial real estate on things, be a lot harder to do commercial real estate if you couldn't use leverage. So it is a tool, but it's also one of those things you have to understand how dangerous it is so that you can know, hey, this is either going to be a tool that is going to accelerate my wealth building or it's going to lead to my demise. And that we're trying to help you avoid the boom bust cycle that you see so many people get into this trap of debt. So, Bo, we've tried to help them by putting together, you need to understand the difference and we even have some rules so you can make sure that you're understanding how to use debt appropriately.

10:13Yeah, that's right. If debt is a tool, it's no different than any other tool. Some tools are appropriate for some jobs and some tools are inappropriate for other jobs. So you have to know the difference and recognize when should debt be utilized and when can it be advantageous and when should it be avoided and when is it not advantageous. And so we kind of walk through student loans and we walk through car loans and we kind of told you about mortgages and homes. But when we think about, okay, how do I discern, okay, is this debt good, low interest, productive debt, or is this debt bad, harmful, high interest debt?

10:50There's a litmus test. you want to work through. And so if you're someone who's in your 20s and you have student loans that are greater than 6%, that may classify as high interest debt. That may not be working for you in the way that you want it working for you. By the time you get to your 30s, it drops down to 5%. In the 40s, it drops down to 4%. When it comes to auto loans, again, this is assuming that you're following 23, 8. But if you're in your 20s and your car loan is below 10%, you may not need to prioritize paying it off quicker than that 36 months. In your 30s, that interest rate drops to 9%.

11:24In your 40s, it drops to 8%. And then when it comes to credit cards, credit cards, when it comes to carrying a balance, are always a destructive tool. They are not something you should use if you carry a balance. So you should never carry it month to month to month. Credit cards should be paid off in full every month without question. Well, and think about it. Those 0 % credit cards, they're a trap is because I don't want you to not feel the pressure of that short-term debt, because you know what happens if you don't pay off those credit cards. You're going to be paying 20 plus percent debt, interest on that debt.

12:03And that's just, that's too far. That's too much. So you need to be scared. You need to kind of respect this tool. So that's why I don't like using those 0 % credit cards. All right. Again, we're talking about, Brian, how to master your finances. So we've covered debt, which can be a tool. Now let's talk about another thing that you have to master if you really want to master your finances, and that's spending. And even depending on where you are in your financial journey, you may look at spending differently. For those that are in the beginning phases, you just have to recognize that the key to financial longevity, the key to being able to build wealth is a very simple concept that you've likely heard over and over and over again.

12:45When it comes to spending, you have to figure out how do I live on less than I make? How do I live below my means? This is probably the greatest indicator of if you're actually ever going to be able to build wealth. If you're one of these people, as soon as it comes in your bank account, it's just as easy out the door. It's burning a hole. It's burning a hole in your pocket. You will never build wealth. And I hate to be so dire with it, but it is. If you can't understand, and this is why it's a great lead into what are the three ingredients to wealth creation. And we've kind of already alluded to this, but I think it's always worth kind of covering this.

13:21The first one is that discipline of living on less than you make. If you can't do discipline of living on less than you make, you'll never get out of the starting blocks of building wealth. But also when you live on less than you make, that margin of the difference actually creates the money, which is the second ingredient, because you have to have something that actually starts allowing you to invest that money or that margin, putting that army of dollar bills to work. And if you give it enough of the most important, the third ingredient, which is time. Guys, if you want to know, whenever I hear 20 somethings tell me that the life is just too hard, they can't invest right now.

13:59I'm like, guys, a little goes a long way because you are a billionaire of time is that it takes just little, little incremental decisions to create huge results. Remember, I was the guy in high school, had the economics teacher say$100 a month will make you a millionaire. And I'm here to tell you it works. So don't think in big terms, even$25 a month will change your life. And if you can figure this out early on, like if you can recognize this soon, it becomes so powerful. It's why we've come up with the idea called the wealth multiplier that for a 20 year old, if you can figure out how to live on less than you make, and you can master that behavior, every dollar that you save for the future has the ability to turn into$88.

14:40But the longer you wait, the less impactful your saving can be. So the quicker you get your grasp around living below your means and creating that margin, the more powerful your dollars are going to be as they begin working for you. So then once you figure that out, you then begin to move to the advanced stage. This is where you recognize, okay, well, not only do I need to create margin, but the amount of margin that I create actually matters. So perhaps at this stage, I need to really begin focusing on either budgeting or tracking where my dollars are going on a month over month basis. There's kind of a theme with a lot of our Money Guy content is that we want you to own your time that much faster.

15:24And you're going to quickly realize, yes, it is true that small decisions have huge impacts, but the bigger the margin, or as you were just laying up, is if you start budgeting and doing some of these other healthy behaviors in the advanced stage, you're actually going to increase how much you can put into your monthly investments. And that's going to accelerate your wealth building journey substantially and exponentially. And then once you know where your dollars are going, it will allow you to then begin to command them in the right way. Because a lot of us want to save for financial independence and we have these long dated goals, but there are other shorter term goals that if we're budgeting and if we're tracking, we can begin building in.

16:05So if you're someone who's in this advanced stage, one of the things you may be doing is you may begin to use sinking funds. These ideas that, okay, I know there's a thing coming and I might not be able to pay for it out of pure cash flow, but if I save for that car replacement, if I save for that HVAC repair, if I want to save for that vacation, because I'm budgeting, because I'm tracking, because I know where every one of my dollars is going, I can begin even creating margin around those intermediate term goals that I have. And sinking funds are a great tool and a great behavior to help you begin to do that.

16:39Well, I think a lot of things in personal finance, if you look at them as a whole, you'll get overwhelmed because you start thinking about how many steps, you think about how much it costs. What I like about sinking funds is it makes bigger goals that you know are upcoming. They're just that much easier because you're planning ahead. You're giving yourself that component of time. You're building that margin in so it actually kind of fulfills itself through that discipline and planning ahead. And then as you continue to advance, again, we're talking about how to master your finances. And specifically, we're talking about how do you master the spending side of your finances.

17:13You've understood that you need to live on less than you make. And you understand you need to command your army of dollar bills. But there is an amount of muscle memory that begins to set in that hopefully once you've mastered it, you don't have to stick to the budgeting and tracking as much you actually get to move to a cash flow management well there's a diminishing return is you getting your 40s think about that's typically the decade people cross into seven figure status if the habits that got you there and then sometimes that's financial mutants we just keep you know if it worked here let's just keep rocking and rolling but there's a diminishing return if you are tracking every receipt and making your spouse come to you for every little thing they spend, at some point you're going to be like, you're going to become known as this tightwad and it's going to impact your family.

17:59It's going to impact your spouse relationship. It will have negative consequences because you've transitioned from financial mutant to financial miser. And so that's why when we talk about the mastery level, we're saying, hey, it's okay if your cashflow management for your spending actually graduates to what we call a cash flow management plan for scarcity, where maybe now you have autopilot for most of the things that you're saving and investing. As you get pay raises or more income streams come your way, you just automatically allocate a portion, but you let the rest in a healthy way go towards healthy lifestyle.

18:34Yeah. So what is cash flow management? It's the idea that I know my dollars are going where they're supposed to go. So it doesn't matter where my other dollars, I don't need to have the grocery budget or the eating out budget or the miscellaneous budget or any of the other budgetary categories because I know that I'm saving the amount that I'm supposed to be saving and that's happening first. So anything above and beyond that, I get to spend and I can spend it freely without having to be concerned with it. Now, one of the things you have to do if you are in a cash flow management plan is you do want to make sure that you check in and adjust it regularly.

19:08just because you were able to start moving from budgeting and cashflow management at age 30 does not mean that your life circumstances have not changed drastically by the time that you get to age 40 and you want to make sure that the amount that you're saving the thing that allowed you the freedom to be in a cashflow management plan has been appropriately adjusted as your lifestyle and as your income changes as you continue to progress through the mastery level of spending behavior. I love how us going from the beginner to mastery really does mimic how just, this is going to be dynamic, guys. That's why be careful of systems that say one size fits all because we just know behavior changes as you graduate through the process.

19:51All right, bro. Hey, Chicago, class it up with Crocs. You know, back to school is coming in fast. So why wait to find your new Fave footwear? Step into a local Crocs store and step into your new look. Try it. Style it. Make it yours. Because the right pair doesn't just show up. It shows off. First day fits, handled. Walk out ready for whatever's next. Visit your nearest Croc store today. When you need to build up your team to handle the growing chaos at work, use Indeed Sponsored Jobs. It gives your job post the boost it needs to be seen and helps reach people with the right skills, certifications and more.

20:33Spend less time searching and more time actually interviewing candidates who check all your boxes. Listeners of this show will get a$75 sponsored job credit at indeed.com slash podcast. That's indeed.com slash podcast. Terms and conditions apply. Need a hiring hero? This is a job for Indeed sponsored jobs. Talked about debt. We've talked about spending behavior. Now let's talk about the third category. This is actually getting our money to start doing something for us. And this is investing behavior. And I think it's really interesting. A lot of people learn about this early on, but it never actually takes hold.

21:08It never actually gains traction. So when you're in the beginning stages, trying to figure out how do I move to mastery of investing behavior early on, you just have to do something. Well, this is the part, and I've already alluded to this is that 20 somethings are already billionaires of time. And if you understood how valuable that component of time was, you wouldn't sleep on it. But so many Americans, I think they come out and they get their first job and they say, you know what, but rent's expensive. Groceries are expensive. I'll wait until I'm in my 30s before I pick up this mantle of building financial independence and investing.

21:48It'll be okay. And I'm here to tell you,$25,$100 a month, which doesn't seem like a lot, just that automated behavior of doing something is going to have huge results. And probably it's going to be the thing that your 50, 60-year-old self is going to have those sloppy tears of excitement for just because you made a minor, very minor decision back in your 20s. So choose your heart. You can either take a little bit of today for that great big beautiful tomorrow or you can defer procrastinate and it's just going to require more and more from you you just said something so beautiful right there the key is to start doing something and then how do you make sure that you continue doing that thing you automate it you put systems and processes in place so that you can't screw it up okay if i'm gonna save 25 bucks a month you know we don't do i'm gonna have that come out of my paycheck every single month on payday before it ever even gets to my checking account.

22:48And if I can do that, I'm likely going to set myself up to begin replicating and recreating that behavior over and over and over. And what that allows you to do is move from the beginning, beginner status up to the advanced status. And once you get into the advanced status, this is where it gets kind of exciting because this is where you recognize how powerful saving and investing 25 % of your gross income. Well, remember in the beginning stage, I was just trying to get you to do 25 bucks, a hundred bucks, because I knew it was to tell you to save and invest 25 % of your income would just be like, oh my gosh, that's aspirational, but that just seems disconnected from reality.

23:27We get it. But if you want to know the science or the math behind, why do we come up with and tell everybody when you get to advance, you want to be at 25%. If you go to money guy.com slash resources, we'll actually show you the intersection points is that of course, if you start saving and investing in your early twenties, 10 % can do tremendous good for you. But unfortunately, the typical American does not discover the wonderful world of finance and the power of compounding interest until their 30s. And you very quickly will realize if you go look at our deliverable here, the 30s is going to probably require you to save and invest 25 % of your income.

24:04And then as we're thinking about being at the advanced level of investing behavior, one of the things we want you to recognize is that time in the market is so much more valuable than timing the market. You've already made the hard decision. I'm going to do something. I'm going to start investing. I'm going to start putting my money to work. But the other half of that equation is you have to recognize that part of being able to be a successful investor is giving myself a long enough timeline to actually stick with it. It's great that you start investing today. But what's even better is when you continue investing for the next 20, 30, 40 years, and it's far too often, we see someone start so strong.

24:47They get excited, they hear this like, oh,$1 turns into 80, I'm gonna do it, I'm gonna start, and then all of a sudden life happens. And it comes in and I'm gonna decrease my savings rate or I have this other goal or I'm gonna shift and you never get back on it. And all of a sudden a year goes by and then five years goes by and then a whole decade goes by And what you do not recognize is, holy cow, the time I missed out on was so, so valuable. So if I want to master, if I want to get to the advanced level and be able to think about moving towards mastery, I have to actually be in the market. I have to actually have my dollars working for me if it's going to be successful.

25:26Well, the stick with it has to be strong for you to be successful. And I've talked about on several shows that first 10 years is probably going to have two downturns. And a lot of people will just quit. They either sell their investments or they'll quit investing any additional funds and they'll just leave with what they had. That is a trap, guys. And if you want proof, we have this saying, we say, when in doubt, zoom out. is because if you go look at all the crazy historical stuff for the reasons why you shouldn't stay invested, but you see it on the grand scale of what's happened over history, you can see that if you just stay with it and just always be buying as we constantly talk about, your future self will be rewarded.