Why Some People Become Rich, But Most Don’t

15:17Brian Preston:When you look at Allen's additional margin for saving and investing, he has none. All of his money is going towards his monthly car payment. But Manny, after he pays off his car in 36 months, now he can invest the entire$772 a month. So you think about these two individuals over 69 months, they have the exact same capital outlay. They're both spending or consuming$772 a month, but they are putting them in very, very different places. So when we stack them up, Brian, after 69 months, they both have a paid off car. Check. Excellent. However, because Manny was able to begin saving and investing and he was able to get that car paid off.

16:02Brian Preston:After this 69 months, Manny has been able to accumulate$42 ,500 in addition to having a paid off car. All Alan has to show for his$7.72 a month is just a paid off car, no additional assets.

16:18Bo Hanson:What I think is interesting is that I think about my younger years, without a doubt, nobody was ever asking to go ride around in my car. Like when you're all going out to eat or doing something. So you do hope that you have a friend that's making the average Allen mistakes. So that way you can look cool. They sure do look cool. And it's nice to ride in those cars when you go out as a group. But I think, you know, the point I have is that we're going to show you, just like this shows right here, is that Manny, at the end of this term of 69 months, he not only, yes, he's driving around in a car that's not as cool, but he's got$43 ,000 in their army of dollar bills.

16:55Bo Hanson:Now you're like, okay, well,$43 ,000. How does that change your life in the long term? Well, here's what we did. We actually, if we grew this, because it's not just that period of time that you're driving the car, it's the opportunity cost of what that$43 ,000 could become with 30 years of growth or 35 years of growth, it's close to three quarters of a million dollars. It's a little under$700 ,000. And a lot of you are like, okay, well, but maybe I'm willing to pay a$700 ,000 premium to be cool and fabulous in my 20s or early 30s. But I want to remind everybody, we've done research on this. And it's back to behaviors of what people who actually have money, who are building wealth versus those who just want to look rich.

17:40Bo Hanson:And we found that in our own surveys of ownership, 84 % of our millionaire clients are driving their cars for seven plus years.

17:48Brian Preston:I love that. Check the box.

17:50Bo Hanson:So compare and contrast that to, we found this for, I believe it was from Yahoo Finance. 65 % of Americans drive their cars for five years or less. So this is not a$700 ,000 once-in-a-lifetime mistake. This is a twice-a-decade disaster that the average American's doing. So if you look at it in those terms, this isn't$700 ,000 of opportunity. This is multi-millions of mistakes that people are making. And do you see how, if I get get in the room with a bunch of 20-somethings who are freshly minted and ready to start jumping on their career and start saving for the future. Don't go buy a fancy car.

18:33Bo Hanson:That is a disaster. The only people who are going to smile are the people at the dealership and the auto manufacturers.

18:39Brian Preston:And the banks. All of those people are going to be smiling. You're going to be the one who's sad at the end of the road. So obviously, buying a car is a very expensive decision that can have huge implications down the road. But there's actually another decision that we see people making. And for most people, this is the single largest financial decision that you will ever make in your lifetime. And so as you can imagine, the single largest decision you might make could have the largest impact to your financial life. And that's buying a home.

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20:12Bo Hanson:Yeah, I mean, once again, this is showing it's not the latte effect. I mean, that's important. I want you budgeting. I want you being good with money. But man, oh man, do you have to watch these big life decisions. And a lot of you, if you hang out with us, we're going to give you some rules on how to do house ownership or rent very well. But if you just go get some level set of where it's the context of what the typical American is doing so we can know what average is, you can see the average American ownership is putting them at 33 and a half percent of their income is going towards housing and their mortgage.

20:46Brian Preston:You can imagine if one third of your income is going towards housing, that doesn't leave a whole lot of room for other stuff like living life today and enjoying the present and saving for the future and building wealth. And a lot of folks fall into this trap. And again, we think when it comes to making these consumptions decisions, there's a better way to do it. That's why we came up with our 3-5-25 rule, which says if you're buying your very first home, you don't have to put down 20%. We're okay if you only make a 3 % to 5 % down payment. But before you buy that home, we want you to make sure that you believe that you will be in this house for at least five years.

21:23Brian Preston:Homes should be long-term decisions, not short-term decisions. And when you look at your total mortgage payment, when you add the costs that go into the housing, we want your total mortgage payment to be less than 25 % of your gross income. So that's the rule. And yet we know that most Americans are spending 33 % of their income on their housing. That's 8 % that's not going towards other financial goals, like building towards financial independence. You can see when you do this, when you put yourself in this position, especially if it's a 30-year mortgage, that's an additional 8 % for 30 years that you're not going to be saving otherwise.

22:01Brian Preston:It puts you in a very precarious position.

22:03Bo Hanson:Well, a lot of you are probably starting to catch on that, look, we're giving you some boundaries once again. With car buying, we're talking about 8%. With house buying, we're talking about 25%. It's because we're trying to make sure you still keep some margin in your life, not only for living your life, but also for saving for the future, that whole concept of deferred gratification. If you go out there and just let the market or the consumption society we live in have its way with you, you will spend every dollar that comes into your household and you'll be miserable. Now, yes, you might be driving a nice car.

22:36Bo Hanson:You're going to be that commercial that we all remember, at least I do from my childhood, of a guy who's on the riding lawnmower in the front yard going, don't you like my house? Don't you like my car? I'm in debt up to my eyeballs. That's not the better way to do money. That's the way, like I said, book of regrets. This is the way, if you just go with what society tells you is going to be okay, you will have periods of looking back and going, what have I done with all this opportunity that I could have been building wealth?

23:07Brian Preston:So if you want to do this right, if you're looking for a tool to help you, you've decided, okay, it is time for me to buy a house. I'm at that stage. It makes sense. We have a tool out at moneyguide.com slash resources. It's our home buying calculator where you can put in, This is my income. This is how much I have for a down payment. This is the interest rate that I can get. Here's how long I'm going to borrow for, where it will actually help you figure out, okay, how much home can I afford? If you use this tool, it'll prevent you from being in that spot where you are house rich, but life poor.

23:39Brian Preston:So again, let's look at how this might look different across two different individuals. Let's go back to Alan and Manny, Brian. Let's assume that average Allen is going to put 3 % down on a$415 ,000 home. Manny, on the other hand, goes out to moneyguy.com slash resources, uses the home buying calculator, and he recognizes that he can buy a$332 ,000 home, and he's going to put 3 % down on that home. Because of Allen's outstanding mortgage, he's going to have a mortgage of$2 ,783, which is 33.4 % of his income. Let's just assume that both Manny and Alan have$100 ,000 household income. So Alan is putting 33.4 % of his income towards the mortgage.

24:28Brian Preston:Manny, on the other hand, follows the money guy rule. He's only putting 25 % towards his mortgage, and that's a mortgage payment of$2 ,083 a month. Alan, because all of his money is going towards his mortgage, He has no additional to save, no margin for building for the future. Manny, on the other hand, has an extra$700 that he can be saving every single month. Now, I can already hear people out there saying, Brian. The trolls are crawling out from underneath the bridge. This is real estate. Alan bought the more expensive home, and that's levered debt, and it's going to make money. If the more expensive home goes up in value, it's going to be better off.

25:05Brian Preston:So we said, okay, great. Let's look at how that plays out. Let's assume that on average, the homes increased by 3 % in value. Remember, Allen's was more expensive, so it's going to be worth more. At the end of this 30-year period, once the mortgage is paid off, Allen's house is going to be worth a million dollars. Now remember, he paid a little over$400 ,000 for it. Now it's worth a million. Pretty solid ROI on that. Manny, on the other hand, bought a less expensive home. It increased at 3%. His house is only worth$806 ,000. So right off the bat, he's saying, yeah, that's why we love her. That's why we have love her growth.

25:42Brian Preston:But wait, there's more.

25:44Bo Hanson:Because remember, Manny was saving and investing during this period. He was taking that margin difference and investing at$700 a month. Well, wouldn't you know it? Now that$700 a month has turned into right close to$1.1 million. Now, look, average Alan, congratulations. On paper, you're worth a million dollars. But we all know you can't eat your house. You have to make really difficult decisions. You either have to downsize, which is a lot of people I think you realize, downsizing, especially if you stay in the same community, is a lot harder than it is to just say it out loud. That's right. The housing is expensive.

26:22Bo Hanson:There's all kinds of things going on. Interest rates are much higher now than they were back then, and you don't want to have debt when you're retired. So it's hard to eat a house. But you have Manny. Yes, their house is not worth what the average Owlens, but they have a million-dollar portfolio to live off of. So that's why their net worth statement shows close to$1.2 million. I mean, close to$2 million in assets versus Allen just having the seven-figure house. But here's what I'm telling you. Once again, you can't eat the house. Manny the mutant, he has close to$44 ,000 a year forever that he can pull out just using a 4 % safe withdrawal rate.

27:01Bo Hanson:That's a lot of it. And you add Social Security on that. Now you're starting to see how just small decisions on just how you live can actually build your entire retirement.

27:10Brian Preston:That's exactly right. It was a million-dollar decision to just have the idea of instead of having a 33 % housing coverage ratio, have 33 % of my income go to housing, instead I'm going to have 25%. Just that one decision over a 30-year period made a million dollars of difference. Again, these small decisions over time can stack up. And Brian, these have been significant, right? So savings rate has been significant, and buying a car has been significant, and buying a house has been significant. But I think the one that I see the most people fail on, and I think it's the one that I see the most people fail the most aggressively on, is decision number four, and that's waiting to invest.

27:56Bo Hanson:Yeah, I need everybody out there. If you fell asleep during any portion of this, or you need to scoot the chair closer to the TV screen, this is the one that's going to be the biggest shock and awe stat for you. And this is the culmination of something we've been sharing with you guys. The most valuable thing you have going for you when you're young, you're a billionaire of time, is that component of time. And if you need proof of this, we have what we call our wealth multiplier. And we even talk about 88 times over. For a 20-year-old, literally every dollar that you come into possession of is worth$88 at retirement, but this is cruel.

28:33Bo Hanson:Like most things in life, it's definitely not fair. So if you just wait and defer investing and turning your money into your army of dollar bills, by the time you're 30, that same opportunity that could be at 20, 88 times over, is now dropped down to 23. That's right. So you heard that. It's four times easier to build wealth when you're 20 versus it is when you're 30. If you fast forward to when you're 40, now every dollar only has the potential to become$7 at retirement. You heard that right. We're now talking about a factor of 10 for the 20-year-old over the person that's 40 years of age. Guys, this is a scary thing.

29:10Bo Hanson:And then when we find out that the average American waits to start discovering the wonderful world of personal finance when they're beyond the age of 30, we got a problem.

29:20Brian Preston:Now, I want to be clear. 30 is not as bad as it could be. It's still young. It's still young, and you still have time to correct force. But again, to correct course. But again, if you start stacking these bad decisions, if you say, all right, I waited till I'm 30, I'm gonna start saving, but all you save is the average American 4.6%, now you're beginning to stack these less than ideal decisions. And if you wanna see how impactful that can be, let's, again, let's go back to Alan and Manny. Let's say that both of them wait until age 30 to start investing. And let's say they both make the exact same income at age 30,$83 ,730.

29:56Brian Preston:dollars. Alan is going to wait until age 30. He's going to say, you know what? At 30, that's when I'm going to start saving. I'm going to do what the average American does, but I'm going to go from zero to 25%. I'm going to hit it running and I'm going to start crushing it. Manny on the other head says, you know what? I understand that maybe I can't do 25%, but I can just do something. If I can just start at age 20 and I can start saving 10 % and every year I'm just going to get a little bit better and a little bit better and a little bit better. I'm going to increase by 1 % all the way out until I get to age 35.

30:30Brian Preston:And then I'm going to save 25 % from 35 all the way to the end of my career.

30:34Bo Hanson:Pause. Cause here's something that I need everybody understand really quick. We just said average Allen's go at age 30. We he's going to save 25%. That's aspirational. That's pretty powerful that he's already at 25%. Meanwhile, Manny, because that's such a big goal, he's saying, nope, I'm going to make this digestible. We're going to start at 10%. And more than likely, your employer is paying for a good portion if you have a 401k at work. So he starts at 10 % at 20. Then he starts increasing at 1 % a year until 25 % at age 35. So if I'm doing this, if you do the math, he doesn't even catch up at age 30.

31:15Bo Hanson:Alan is still saving more money. So this literally is going to show the example of somebody who just starts earlier, not more necessarily from a savings rate. I'd be curious to see how this plays out.

31:27Brian Preston:What's really, really interesting is when we look at their two tracks, you look at their two trajectories over a working career from age 20 out to age 65, Allen still ends up with an amazing portfolio. Don't mishear us. We're not trying to poo-poo on what Allen was able to accomplish because if you're that 30-year-old that hasn't started saving and you begin saving 25%, we love that. If you do that over a 35-year timeline, Alan ends up with a portfolio of$4.3 million. It is very, very impressive. But Manny, who figured out, man, time is my most viable resource. When I can just start early and get a little bit better through time, Manny actually ends up with almost$7.3 million more.

32:15Brian Preston:It's almost a$3 million spread just from starting early.

32:20Bo Hanson:So then we were like, okay, let's do some goal-seeking. Because we already gave, Alan's doing 25%. What if he, just because he deferred, he wanted to enjoy his 20s the most. What if he increased his savings rate at age 30 to 30 % instead of 25 %? Are you already seeing this on the screen? He's still a$2 million delta between these. Even at 30 % savings rate, just because he started later is$2 million less. It's$7.3 million versus$5.2 million.

32:48Brian Preston:He never got passed on savings by Manny. He always saved 30%. Manny only saved 25%. So you would argue from age 30 till 65, Allen was the better saver. He was saving more money and still couldn't catch him. But wait, there's more.

33:07Bo Hanson:Go to 35%. By the way, that is a steep savings rate for somebody in their 30. Still doesn't catch Manny the mutant, who's at 7.3. And then what's the savings rate? Because like I said, we goal seek this. You'd have to save 42 % of your income. Now, don't mishear us because I do, I agree. Most Americans don't figure this out until they're already beyond their 30. I know a lot of our audience is in that key element between 26 years of age and 45 years of age. And you might have just come across our content. Get to 25 % as fast as you possibly can because the longer you defer this, the more the weight falls on your shoulder and your savings and investment rate.

33:46Bo Hanson:We just want to highlight the fact that getting there early and often is rewarded, and that's why we just want to draw light through mathematics and show you that you do have decisions, not only with how you save and invest, but also how you consume. And if you bring these small decisions together, you can change your life. You can change your children's life. You can change the orbit of all those people that surround you. It is that important.

34:12Brian Preston:What I think is so wild is these four decisions. How much am I going to save? What kind of car am I going to buy? What kind of home am I going to buy? And when am I going to start investing? Are decisions that most of you out there will make. It's not like these are unique decisions that unique people are going to have to make. We all face these decisions. But if you can have the mindset of a financial mutant, if you can go against the grain, if you can think differently than the average American, you can have a future and you can have a financial security that does not look like the world around you.

34:48Bo Hanson:So we do shows all the time. We have collabs. We do other things. And what's funny is we've been doing this so long, since 2006, that we have you guys coming to us all the time that you started these simple decisions, but because of your success and your discipline, your life has gotten complex. And I feel so thankful that we get to be the educators that come into your house many times a week sharing the simple basic facts of how money, math, the intersection, how all these things work together. And then if you do this well and you do it often enough, success is going to find you and success is going to create the complexity that you realize, hey, I just don't know what I don't know.

35:28Bo Hanson:I don't know where my blind spots are. I know I've only got one retirement and I don't want to screw this up. We'll leave the porch light on for you. That's why we work with clients. By the way, we do need to correct the record. It's not South Dakota anymore. We have one state that we're missing and it's the state of Vermont. We have clients in 49 states We'll leave the porch light on for you. We love helping people master their money and really optimize their path so they get to do more of what they want to do and control their time and live their life how they want, when they want, and maximize all those key elements of life.

36:03Bo Hanson:I'm your host, Brian, joined by Mr. Bo. Money Guy team, out.

36:10Brian 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.

36:39Brian Preston:All investments involved...

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