The Ultimate Money Rules: Simple Steps to Build Wealth Fast

0:01I'm not giving up. I am selling the building.

0:06Brian Preston:The final season of FX is the bear. The restaurant is flooded. Everything's either going to be okay. Or not. We are outgunned and we are outmanned. We have each other. FX is the bear. The final season. All episodes now streaming on Disney+. So good, so good, so good. New summer arrivals are at Nordstrom Rack stores now. Get ready to save big with up to 60 % off brands like Rag & Bone, Levi's, Adidas, and Free People. Join the Nordic Club to unlock exclusive discounts, shop new arrivals first, and more. Plus, buy online and pick up at your favorite rack store for free. Great brands, great prices.

0:52That's why you rack. If you've ever caught one of our live streams, you know we absolutely love answering your financial questions. And what we love more than answering your questions is answering them with a rule of thumb that makes your finances simple, easy, and clear.

1:09Brian Preston:Brent, I am so excited because over the years, we've come up with a lot of these rules of thumb or these guardrails that address questions that we get all the time. And today, we want to put them all in one place for you. decades of wisdom wrapped up into one show just for our financial muse. That's right. This show has everything you'll need to know how to tackle debt, invest well, and make your way to millionaire status. If you're wanting to level up your finances quickly and simply, this is the one for you.

1:47Brian Preston:All right, Brian. So we said the way we've put together these rules is by common questions that we get asked. We thought it'd be great to lay out what those actual questions are and then walk you through the rules that can help you figure out how to navigate that. And the first one is a big one, and this is one that a lot of Americans are faced with right now. And the question generally goes something like this. How much is too much student loan debt? Oh man, this is one, if you want to know the inception story for this one, begin with the end in mind, is that if you're going to go and take on debt supposedly to better yourself for more income, let's actually set up a rule.

2:22And here it is. It's called the first year financing rule, meaning that we don't want you to take on more student loan debt than what your first year of anticipated income will be.

2:32Brian Preston:We already know that getting out into the workforce, starting in our careers is difficult, but it becomes exponentially more difficult. We have this huge burden of debt that we're dragging along beside us. And we've already said a lot of Americans are facing this. Right now, 44 % of Gen Z has an outstanding student loan balance. 14 % of student loan borrowers say that they owe more than$50 ,000 right now. And 24 % of adults responsible for student loan debt say that I don't think I'll ever actually be able to pay this off. I don't think it's ever going away. So folks have just resigned themselves to always having on their balance sheet.

3:12Yeah, this is one of those things where I get sad because so much of education, we're asking people who are 17, 18 years old to make these lifelong decisions. And when you see a stat like 24%, essentially one out of four people think they'll never pay off their student loans. This is why it's so important. If you have a young person in your household, once again, begin with the end in mind so that you don't find yourself in a trap on something that should be so valuable like education.

3:41Brian Preston:All right, so student loans is obviously a big thing, a big purchase that a lot of people make. Well, let's talk about another big purchase. And I would say this even hits more people maybe than the student loan. And here's how the question usually goes for us. Hey guys, how much car can I afford and what's the best way to pay for it? Let's have some real talk here. For all the ad campaigns in this consumption society we live in, The reality is cars are napalm for your personal finances. It's not the latte effect. It's these big decisions like cars, houses. And this is a big one because I think it's the gateway to bad decision-making for a lot of people.

4:19When you get out in the workforce and you first start getting your real wages, that first job, is instead of letting that money start work, too many people let a high percentage of that income go right into high car payments.

4:32Brian Preston:And so what can you do? What's the rule that can protect you? we want you to follow 23.8. What that means is we want you to put down 20 % on the purchase of a car, whether you're buying new or used. We want you to finance it for no more than three years or 36 months. And your total car payments, all of your car payments cannot exceed 8 % of your gross income. If you can do this, you'll make sure that you keep yourself inside of an affordable automobile. But there are two caveats you ought to be aware of. Number one, luxury cars are a no-go. If you're buying a luxury brand. You don't get to do 23.8.

5:05Brian Preston:You have to pay for it in cash or have it paid off inside of 12 months. And you never want the amount of your car payment to be greater than what you're saving in your investments on a monthly basis. If you're doing it the other way, you're doing it the wrong way. So you might be asking yourself, why do we have these rules? Well, let's go ahead and get some facts on what's going on in the current state of this consumption society we live in. The median single income in America right now is$45 ,140. But guess what? The average new car,$50 ,080. Do you see how these things, they are completely, they're not supposed to be the same.

5:44And I don't want you going out there and running up car debt that exceeds what your annual income is. That is just a recipe. Like I said, napalm for your personal finance.

5:54Brian Preston:What's wild is that right now, did you know that one in six, one in six car payments is over$1 ,000 a month. And yet most Americans aren't even saving and investing$1 ,000 a month. They are getting it wrong. And while it seems like Americans are driving their cars for longer, it seems like that maybe something is going on. Would you believe right now that 22 % of new car loans have a term, have a financing term of over seven years? So there's a lot of folks who only drive their cars for three, four, five years, and yet they're borrowing an amount for seven years. They're never getting out from being underwater on their automobile.

6:34Well, it makes sense because this is more of a sales tactic than I think it's people choosing to have car loans for seven years and beyond. because a lot of times when you roll into the car dealership, they'll say, hey, what do you want your car payment to be?

6:46Brian Preston:Hey, what can you afford on a monthly basis? And that's the thing. I don't care what your income is. If you can spread out the amortization long enough, pretty much anything becomes affordable at some point. And that's a disaster. So we want to protect you. That's why 23.8 will make sure that the car you buy reflects what you can afford and also leaves you enough margin so you actually have money left over to start investing for the future as well. And if you are in the place where you're thinking about buying a new car, we actually have a great calculator for it. You can go to moneyguy.com slash resources, and you can play with our car buying calculator.

7:18Brian Preston:And you can adjust the variables accordingly, and it will tell you, okay, if I want to follow 23.8, how much car can I actually afford? Again, you can go to moneyguy.com slash resources. So, Brian, we've talked about student loans, which is a huge purchase people make. We've talked about cars, which is a huge purchase people make. Let's talk about another one that is a huge purchase. And for a lot of people, this might be the single most expensive thing that you ever spend money on. And this, again, is how the question goes. Hey, guys, how much house can I afford? And when I do it, how much should I make as a down payment?

7:51Yeah, this is one that we look. I think we get a lot of credit for being flexible on the first purchase. But man, oh, man, do we probably take some flack on affordability on the ongoing side of this. So let's share with you the rule of 3-5-25. And when we say 3-5-25, what we mean is we want you, on your first house, your very first house, we give a lot of grace in that. We say, look, we asked around all of our financial advisors. We looked at ourself, and we had a no-hypocrite policy. We realized nobody's putting down 20 % on the first house. We're typically putting down 3 % to 5%. So you can, on your first down payment, on your first house, you can put down 3%.

8:32Make sure before you even buy a house that you're going to be in this house longer than five years. There's just too many friction and costs that you're going to pay out of pocket when you close on a house that you don't want to think of this as a short-term decision. And then we want to keep, and this is the one I know it's going to squeeze you, but this is why we give you grace in so many other places. We want you to keep your monthly costs below 25 % of your gross income. And the reason we want you to do this is because we don't want you to be house rich, life poor with the inability to build wealth outside of your house.

9:05Too many Americans, that's the only place they have wealth is in their house. We're trying to help you build and create your army of dollar bills.

9:12Brian Preston:So many people view buying a house as a no-brander. Guys, guys, guys, it's an asset. It only goes up in value. If I buy a more expensive house, then I will be able to get more appreciation. It can't go wrong. And that, unfortunately, is just not true. So if you can follow the 3-5-25 rule, again, will make sure that you don't justify yourself into making a decision that will derail your future financial wealth building ability. And again, if you are someone who's thinking about buying a house, thinking about moving, thinking about going into the home ownership side of the equation, we have a great tool for you.

9:45Brian Preston:Go to moneyguide.com slash resources, and you can check out our home buying calculator. Again, you get to adjust the variables. We're going to make sure that you fall inside of the 3-5-25 rule so that you make a decision that still allows you to build towards your great, big, beautiful tomorrow. So, Bo, the next one that we... Look, this one makes us divide from the other content creator that lives in town with us is credit cards. Yep, this is a big one. Here's how the question normally goes. Hey, guys, I've heard that credit cards are something I should not do. They are evil, they are bad, they are dangerous.

10:21Brian Preston:us, is it okay if I want to use credit cards? So here's our stance on this. Credit card use is A-okay. However, don't mishear us, credit card debt, no way. And those two are not the same. Credit card use is not the same thing as credit card debt. There are tons of benefits from using credit cards. You may get rewards, miles, cash back, consumer protections. It may be convenience. It may be a number of reasons why you might want to use them, but there is almost never, And I mean never a justification for carrying a balance month over month over month. If you're doing that, you are allowing compound interest to work against you instead of working for you.

11:00Well, I mean, think about it. Credit cards had predatory interest rates on them. That's why this is such a very big line in the sand is because if you are paying them off monthly, we have all kind of history out there with our millionaire clients, even with our financial mutants that watch our content. You guys use credit cards. Yep. But here's how you're using it different than the people that are using them as a trap, is you're paying them off every month. Every month. If you find that you are actually carrying an interest, you're paying interest every month because you're carrying a balance, then I would tell you, you're just not a credit card type person and you should cut them up, freeze them, do whatever you can to keep you restricted from using these dangerous but effective tools.

11:39Brian Preston:Okay, guys, I hear you. I hear you saying that, okay, credit card use is okay, but debt is bad. So that must mean I need to get rid of all debt. If I am actually paying interest on anything, that means it must be bad. And so oftentimes, the next question we get that rolls in is, all right, well, should I pay off this debt? I heard you guys say this bad. Or should I invest? Yeah, this is one, even internally, because look, it's a balance there. We're always trying to walk this tightrope of, we know that sometimes, I know for me, when I first got out of college, got my first job in public accounting, I needed a car to get to work.

12:16but I also needed to get to work reliably so that I could actually have that job that would actually let me start saving and building margin, living on less than I make. So you're going to find out that sometimes you get in situations where debt can be an effective tool, but we got to have this ability to start investing so you don't always have to work for your money. We need your money working for you. So we figure let's go ahead and share some, give some guidance on how you might have to balance It's this delicate, delicate thing so you can have debt as a tool, but also be building investments in the background so one day you have financial independence.

12:54Brian Preston:Well, I think one of the things we have to discern is not all debt is created equal. That's why, Brian, will you hold the thing up for me? That's why we have the financial order of operations that will walk you through the nine steps of what to do with your dollar. And there are two different steps for debt. There is step three, which is high interest debt. And then there's step nine, which is low interest debt. So one of the questions that you have to answer is, okay, what counts as high interest debt and what counts as low interest debt? And that is where our rule comes in. If you are someone who currently has student loans and you are in your 20s and your student loans are above 6%, you may want to start prioritizing that.

13:33Brian Preston:In your 30s, that number goes to 5%. In your 40s, that number goes to 4%. If you're someone who has used 23.8 and you were inside the confines and you have auto loan debt and you're in your 20s and your interest rate is above 10%, you may want to begin prioritizing that car payment. If you're in your 30s and the interest rate on your loan is above 9%, you may want to prioritize. And in your 40s, if you have a car loan and it's above 8%, you may want to begin to prioritize that. And then of course, if you are someone who is using credit cards, it is okay to use them, but it is never, never, never okay to carry a balance.

14:10Brian Preston:So if you have any balance on your credit cards, you should pay them off right now today and not carry those forward. I think a point of clarification on this is I think like when I look at the car loans, people are going to be like, wow, I'm surprised by it. But realize, I think of myself, I was broke as a joke, had no money. So this was a reasonable thing to get me out of the gates. We still, we always say it all the time. We'd rather people pay cash for cars and take any car debt whatsoever. But this is also the beauty of 23.8 is that three years, not financing longer than three years, is going to keep it in such a limited time window that it's not going to eat you alive with the depreciation, with the interest, and all the other things, because it'll keep your car payment and keep the amount of car very much in check.

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16:09Yeah, this is one. Look, there's all kind of rules out there that say, if you read like I did, The Wealthy Barber, it talks about 10%. Another person that wrote a book in the 90s might have 15%. Here we are saying 25%. You're like, whoa, why is there so much spread out there? We understand that timing matters. And we know in America right now, a typical person doesn't start saving and investing until they're in their 30s. And we also give a lot of grace in our rules when we talk about savings. If you make less than$200 ,000 of income, you get to count your employer contribution as well.

16:46Brian Preston:So when it comes to saving 25%, that's our goal. I want you saving and investing. What this includes, this includes contributions to your employer-sponsored plan, your 401ks, your 403Bs, your 457s, your simple IRAs. It includes IRA contributions or HSA contributions if you're investing those. If you have mandatory pension contributions you have to make out of your pay, that can be included. Your employer match can be included, assuming you meet the income thresholds that Brian just said. If you have an employee stock ownership plan or an employee stock purchase plan, or if you're just saving in a plain Jane regular old taxable brokerage account, but those dollars are earmarked and pegged for the future of financial independence of you and your loved ones, then that gets to count towards the 25%.

17:32Brian Preston:And if you can save 25%, the earlier you do this, the more freedom and flexibility you're going to give yourself later on down the road. Well, also I think it ties into, don't skip out on the financial order of operations. There's a reason when we structured this thing, we pigeonholed right in the middle of the employer match, because that's the free money. That's even more valuable than sometimes the high interest you're paying on the credit card debts and so forth. But then we get you past the emergency reserves, and then we're off to the races. Let's load up on those tax-free accounts. Let's hit those retirement accounts.

18:04Don't skip. Just because we say 25 % retirement, there's also nuances of when, and make sure you don't skip out on the financial order of operations.

18:12Brian Preston:Okay, Brian, I hear you. I need to be saving 25%, but when is the right time? What if the market is going to go down? What if we're at all-time highs? Or what if the market has been kind of scary, and I just don't know if we're at the bottom? When is the right time to be investing? Look, this is one. I love this rule because it serves you when things are rocking and rolling. It serves you when things are scary. You're like, there's no way I'm putting any money out there right now. Here's what will save you. A, B, B, baby. Always be buying. and I think if you can have this mindset, it will truly turn you into a financial mutant because it will protect you from letting the emotions of, hey, the market's overvalued.

18:56Hey, the market's kind of scary right now because it just lost 25%. This will allow you, you know what? I have the mindset that I know what I need to be doing to reach retirement here. So I'm always going to be buying into it so that I can live my best life.

19:11Brian Preston:What I love about it is it removes emotion from the equation. Okay, do I want to max out my Roth IRA, do 7 ,000? Great, I'm going to do$583 every single month. Okay, I want to put$12 ,000 into my 401k this year. Okay, great, I'm going to do$1 ,000 every single month and I don't have to think about it again. If the market goes up, contributions I put in last month are making money. If the market goes down, the contributions I'm putting in this month are getting in at lower and lower levels. It is a win-win-win if you can do it this way. So then, okay, guys, I hear you and I'm following the financial order of operations and I love this.

19:44Brian Preston:I'm going to start doing my 401k. And I go to the website and I log in and I go to check it out. And immediately I'm hit with a question I don't know the answer to. It says, should I, when it comes to my 401k, be investing in the pre-tax portion or should I be investing in the Roth? Well, this is one. And look, we're going to give you the mindset, but then we're actually going to be crazy enough that we actually try to put some rules around this because a lot of people, I hate it when I go to see a talking head and they kind of tell me what I should consider, but then they don't actually give me a rule.