The Financial Plan that Could Change Your Life

18:00Bo Hanson:I think it's interesting. We started this in his early 20s, and he was very disciplined. But I got to tell you, it took a while. And look, I don't mind being completely transparent. I've shared going through the financial order of operations, I didn't feel completely comfortable or feeling like I had money and margin, a lot of margin in my life until I was actually in my early 40s. So I think it's pretty normal that here's Freddie doing his best life, but even at age 27, it's probably not until he gets to step five that he feels like he's an unleashed financial mutant because now he's actually loading up his Roth IRA and doing things.

18:34Bo Hanson:I share that only so you see the transparency of it's okay if you get frustrated that this is going to take some time to build this success.

18:41Brian Preston:So once we get the money going into the Roth, going into the HSA, we get to check step five. We get to check maxing out those tax-free accounts. So now that we've maxed out the tax-free accounts, we've maxed out the Roth, we've maxed out the HSA, now we get to go to step six, max out your retirement account.

19:00Bo Hanson:Yeah, now this is, look, we've always been very transparent about this too. As a lot of people get to step six and you see max out retirement, you're like, wait a minute, okay, I gotta start doing some math on this. And you know, if the maximum you can do is 24 ,500, that's$2 ,041 a month. Freddie doesn't have it. He doesn't make that. He doesn't make enough money. So does that mean now I'm trapped in step six forever until I get huge pay raises? No. At some point we're going to need to do a check to figure out what's your savings rate, where you are. Because we know that Freddie's margin is$137 to put into this 401k.

19:36Bo Hanson:That's a far cry from 2041. But this is also a good time to stop and evaluate and say, hey, where are we at with our 401k and our contributions? Because maybe we can actually increase this margin if we take into account all the things that are working for us.

19:52Brian Preston:Yes, he's not able to max out step six, but he is able to improve. He does add that$137. So now he's putting$312 a month into his 401k. So if we think about Freddie's monthly savings, we know that he's got$312 going into his 401k. We know that he has$625 a month going into his Roth IRA. We know that he's got$366 a month going into his HSA. So if you add all of that up, he's saving$1 ,303 a month. But if we think about his$70 ,000 salary, we know that we want him saving 25 % of his gross income, he needs to be saving$1 ,458 a month. Brent, it looks like Freddie's falling just a little bit short.

20:38Bo Hanson:Yeah, this is where people often wonder, where do your numbers come from? We always say, look, if you're close enough to the social safety net, if your income as a single individual is less than$100 ,000,$200 ,000 for a married couple, you actually get to count your employer match in that 25%. Well, we already know his employer is giving him 3%. It's a dollar-for-dollar match on the first 3%. So that's incredible. That immediately pushes him up to$1 ,478, which actually beats the 25 % by$20 a month. This is magical because this means actually Freddie is a financial mutant who's not only graduated through steps one through six, he's now into step seven of hyper-accumulation.

21:22Brian Preston:It's wild. if we think about this, Freddie is just two and a half years into his journey, two and a half years into his working career, and yet he's already built a solid financial foundation and he is starting to stack up dollars for his future. We just figured out that based on his income, he's saving 25 % of his gross income at the ripe age of 27. Well, if you go out to moneyguy.com slash resources, we have a great deliverable called How Much Should You Shave?

21:54Bo Hanson:You should shave enough to have just the least amount of facial hair that you want.

21:59Brian Preston:How much should you shave at moneyguy.com slash resources, which shows that starting at his age, he's somewhere between age 25 and 30. If he can save 25 % of his gross income by the time that he gets to financial independence, by the time that he gets out to age 65, he'll be able to get a pay raise. He'll be able to retire with a higher standard of living than he had during his working years, or what's more likely, he's going to be able to have more options sooner and earlier in life. This is how powerful the financial order of operations can be if you figure it out early and begin putting these parts and pieces into place.

22:40Bo Hanson:Well, and look, we recognize this is a non-step system. And here's Freddie. He's in step seven. This still leaves two additional steps. We've got prepaid future expenses, which is step eight. We also have step nine, low interest debt. Well, this is the part where Freddie kind of gets his choose your own adventure. We already know he's single. He doesn't have children yet. He doesn't necessarily have any mortgage debt to pay off. So step nine is not really a big consideration. Step eight, yeah. So maybe he's traveling a little bit more. Maybe he has a little bit nicer car payment. Or maybe he's living life on consumption a little bit more.

23:15Bo Hanson:he could, or he could save this, whether it's additional cash, whether it's additional investments. It truly is a choose-your-own-adventure at this point for Freddie.

23:23Brian Preston:What I think is wonderful, because what I want you to see is, okay, what do we do? We followed the financial order of operations. We just followed the nine-step process. And so one of the questions you may be asking is, okay, well, where is this leading Freddie? Okay, yeah, I get it. He did this. And yeah, I get it. He did this. What does he actually end up at? What does his future financial life look like? And we never assumed that Freddie's income made it to$100 ,000. We didn't give him any big promotions or big pay raises. This was just taking some behaviors he figured out in his mid-20s and applying that across the remainder of his working career.

23:59Brian Preston:And do you realize if he does this over an entire working career, by the time he gets to retirement, he would have a portfolio of almost 5.8 million dollars. Now again we didn't do pay raise we didn't do cost of this that's 5.8 million in today's dollars just by executing the financial order of operations starting in his 20s.

24:20Bo Hanson:Well I think it's you know this this shows is a great case study is that we've know we know the data out there when people cross into millionaire status is typically your late 40s and look Freddie even though he never made six figures income he crossed into seven-figure status, the two-comma club, right at age 48. So I'm telling you, this is the thing when people – what I love about this is I want you to use this as motivation is that we wrote this scenario and went right down through it, but everybody's going to be different. A lot of you will get a later start. Some of you will get a later start.

24:52Bo Hanson:Some of you will come into this with a later start, but a bigger income. Some of you guys use wherever you are. the financial order of operations will meet you where you are and help you maximize what to do with the next dollar. I just want you to get motivated. I want you to get excited and not feel like the system is stacked against you.

25:11Brian Preston:One thing I think is beautiful about this illustration is you can see that in his first 20 working years from 25 to 45, he goes from zero to $800 ,000. But in the next 20 working years from 45 to 65, he goes from 800 ,000 to 5.5%. $8 million. If you can let your money work for you, it will do incredible things.

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26:50Brian Preston:We said the financial order of operations is not a straight line. And what we just showed you through the Freddie case study was kind of a straight line. So we said, hey, let's throw some wrenches in there. Let's say, okay, how does it impact it if some things change? So we said, okay, very first wrench, what's this look like if all of a sudden Freddie has an event take place and it wipes out his emergency fund? Emergency funds are supposed to be for those unknown, unknown things that come our way and it completely wipes them out. So the example that the content team came off with.

27:24Bo Hanson:Big Zootopia fans, I think.

27:25Brian Preston:They said, Freddy's nephew took his phone and bought 11 non-refundable VIP tickets to a Shakira concert in Rio de Janeiro. And this wiped out all of Freddy's emergency fund. So what does he have to do? He has to go all the way back to step one. Remember, this is a guy who was crushing it. He was in step seven of the Foo, and then this thing happens, and he has to go all the way back to the beginning.

27:51Bo Hanson:So let's see. It's going to take approximately. If you did the math on this, This would be about seven months of missing investments. And that's okay because as we actually show you what the cause and effect relationship is, is that you recover. This is what I love about the financial order of operations is even when life happens, and I know we took some liberties trying to be funny with this, you're going to be okay. The system will meet you where you are and help you navigate out.

28:19Brian Preston:So I'm going to say it even differently. Taking off seven months of investing to step back and rebuild, instead of Freddie retiring with a portfolio of$5.76 million, his portfolio still makes it to$5.47 million. He still makes it to financial independence. Okay, but what if we have another type of wrench? Remember, one of the things we said is that Freddie had this great thing where he worked with an employer that gave him a dollar-for-dollar match on the first 3%. So he got free money from the jump. Well, what happens if at age 28, when he is starting to get some traction in his career, he decides to shift jobs?

29:00Brian Preston:And when he shifts jobs, he now moves to an employer that does not have a 401k match. They still have a 401k plan available, but there is no match. What does Freddie do? Well, he goes back to step two, and there is no employer match in step two. So it doesn't necessarily change his investing behavior, but what it does change is he now misses out, and we said if he's with his employer for 10 years, he now misses out on that employer match. $175 a month that he was getting from his employer for 10 years. Even if that happens and the free money goes away, it's still not a detrimental blow to his financial life.

29:42Bo Hanson:What I think is, look, this is where I'm an optimist, even in negative situations, is because when we actually do the math on this and when we ask ourselves, what does$175 per month invested turn into? You can see the difference here is close to$400 ,000. If you would have told me, hey, if we go invest$175 a month for the next 10 years, what's the impact going to be? I don't think a lot of people, because if you do$175, I could probably, you know, times$120. that's only$175 times 120 months. That's only$21 ,000. To say$21 ,000 impacts your life to close to$400 ,000 shows the power of compounding growth.

30:25Bo Hanson:Now, yes, it stinks that his account is worth less, you know, close to$400 ,000, but Freddie's going to be A-okay.

30:32Brian Preston:He's still okay. So then let's say, okay, well, what happens? Okay, maybe it's not losing an employer match or maybe it's not some emergency fund thing. Maybe Freddie is just a normal person that wants to make normal people decisions. And he decides, you know what? One of my financial goals is I want to buy a house. And I know that the average first-time home buyer is somewhere in their early to mid-30s. So we say, okay, what happens if Freddie decides age 35 he wants to buy a house? Well, the very first thing Freddie's going to do is say, you know what? I understand there's a better way to do money.

31:08Brian Preston:So when I go to buy my first house, I'm going to make sure that I follow the 3-5-25 rule. That's 3 % down, not 20 % down necessarily, but at least 3 % down. I don't want to be in the house or in that home for any less than five years. I want to make sure I can see myself there. And I want to make sure that my monthly housing costs do not exceed 25 % of my monthly gross income. Now, this is a place to pause, Brian, because what a lot of people don't recognize is that the 3 % and the 25 % have to coordinate. A lot of people say, oh, I'm going to put 3 % down, but if I only put down 3%, I may run afoul of the 25%.

31:49Brian Preston:I may have to put more down. And what Freddie determined was, man, you know what? In order for me to follow these home buying rules, I'm going to have to put down more than 3%.

32:00Bo Hanson:Yeah, we backed into the math. We'll go ahead and do that for you. We figured out it was good, be 9 % to still qualify under the 25 % amount. So yes, we gave, you know, if you know our 3-5-25, we do give a lot of grace on that down payment where it can be as low as 3%, but we do want you to pay respect to the fact of, so you're not house rich, life poor. This actually would hold Freddie back by, he wouldn't be able to invest. It would take him 18 months to come up with that house down payment. That's a big deal for a financial mutant. So you can imagine, and not only that, it didn't only take him backwards on saving up for the down payment.

32:35Bo Hanson:We figured out, because a lot of people, if we're having an honest conversation, when you buy the house, there's some additional expenses that come into your life too. So we even took into the consideration that now your monthly housing and living expenses are going to be higher. What did we assume? About$1 ,000 a month?

32:52Brian Preston:Well, what we said is because they're higher, he's only going to be able to save$1 ,000 a month. Remember he was saving substantially more than that. But now at age 35, he buys this house. It's a new financial goal that he has, but he has to decrease his savings. Well, even having to decrease his savings to$1 ,000 a month at age 35, because he did a lot of the hard work early on, because he followed the financial order of operations from 25 to 35, he still, even with a reduced savings, even not saving 25 % of his gross income, he still gets to retirement age 65 with over$4.6 million. Again, even though it's a lower number than original, I think that Freddie's going to be okay.

33:38Bo Hanson:So we've done, what I find interesting, Mo, is now none of this is bad, but besides the Shakira tickets, that was negative. But the next one, a life decision, that's a choice. But life's not always bad news or sideways ways moves. Every now and then, the world and life smiles upon you. And what if all of a sudden, at age 40, he got a really large pay raise? What would that do to this?

34:05Brian Preston:Yeah, what's great is we said, okay, what if he gets a significant pay raise? And now, because of that, he's able to save any more. So he takes this new job and he gets this new raise, and he's able to invest more in his 401k. What if at age 40, even though he was following the Fu from 25 all the way to 40? What if he was able to kick it up a notch? And he started saving $2 ,000 a month starting at age 40. Well, on his normal path, by the time he got to retirement, he was able to retire with about$5.7 million. But just by being able to save in his highest earning years from age 40 to 65, now his retirement nest egg is$6.3 million just because instead of allowing that money to go purely to lifestyle, he allowed it to also build for his future financial well-being.

34:59Bo Hanson:I've really enjoyed going through this exercise because when we talk about the financial order of operations, I always say it's the all-weather, all-terrain type vehicle. And this shows you because the other part about what we get to do for a living, Beau, is that I love that we treat, we looked at every one of these things kind of independently of each other, is that I always say that there is not just one path to success. There are literally to infinity and beyond paths of success. And we've just now covered, here's five different paths. And what I think is interesting is they go from$4.6 million of success all the way up to$6.4 million of success.

35:36Bo Hanson:Your life really is a choose your own adventure. And you kind of have to figure out what you as a financial mutant want to get out of life because we'll give you the numbers, we'll give you the mindset, but at the end of the day, personal finance is definitely personal.

35:50Brian Preston:And what I love is, is no matter what life throws your way, no matter what thing happens while you're in this accumulation phase, we want the financial order of operations to be your benchmark. We want it to be your compass. We want it to be your guide that lets you feel confident that you know exactly what you're going to do with your next dollar. We've built this both through our personal experiences as well as the experience we get to share with hundreds and thousands of financial mutants out there that have been able to successfully navigate their financial lives. This isn't just theory. It's not just academia.

36:28Brian Preston:This is a real-world system that we have seen really work in practice for real people every single day.

36:36Bo Hanson:Yeah, so that's why I want to invite you. If you look at this and go, yeah, but how does this pertain to me specifically? You've got several options. The easiest, and by the way, we wanted to make this as easy as possible. If you go to learn.moneyguy.com, we actually have the Financial Order of Operations course. We updated this. We dropped the price to like a quarter of what it used to be. You heard that right. We really did shave off about 75 % of the cost. It's because we wanted to make this as accessible as possible to our audience. And by the way, even if that's too much, we also have my book, my New York Times bestselling book, Millionaire Mission.

37:09Bo Hanson:We'll walk you through the financial order of operations because our biggest thing is that I want you to live your best life. Bo wants you to live your best life. We want you to be a financial mutant without regrets. And we know that even though building wealth is relatively simple, it doesn't mean it's easy. Because what happens is when you start doing these simple steps over and over, you're going to find that even though you're trying to keep it as simple as possible, complexity will show up. And guess what? Once again, just because we planted that seed that turned into a giant elm of success, we'll leave the porch light on for you.

37:42Bo Hanson:That's why we work with clients in 49 states all across the country. We love to make it 50. So reach out to us. I'm your host, Brian, joined by Mr. Bo, Money Guy team. Out.

37:55Brian Preston:The Money Guy Show is hosted by Brian Presson 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.

38:25Brian Preston:All investments involve a degree of risk, including the risk of loss.