What is the 3 Bucket Strategy? (And How to Do It Right)

"Can you talk about what the 3 bucket strategy is and when we should start considering diversifying our retirement account to more than just target date funds?" We'll walk you through that question and more in today's Q&A episode! Jump start your journey with our FREE financial resources Reach your goals faster with our products Take the relationship to the next level: become a client Subscribe on YouTube for early access and go beyond the podcast Connect with us on social media for more content Bring confidence to your wealth building with simplified strategies from The Money Guy. Learn how to apply financial tactics that go beyond common sense and help you reach your money goals faster. Make your assets do the heavy lifting so you can quit worrying and start living a more fulfilled life. Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 0:30Speaker 01

  It's getting chilly outside. But you know what that means? It's time to cozy up with Panera Bread. Let's get toasty, cheesy. Oh, hello, broccoli cheddar soup in a bread bowl. How about melty? Okay, Chipotle Chicken Avo Melt. It's dipping bread and soupy goodness season. Oh yeah, we are so back. It's Panera season. Order now.

• 1:05Speaker 02

  All right, this next one is from Skibidi. "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 you still need to max out with step six?

• 1:27Speaker 03

  So, this is a great question. And one we get asked all the time as it relates to the financial order of operations, people will say, "Hey, at my income level, when I calculate what 25% of my gross income is, and I max out my Roth IRA at $7,000, and then I max out my HSA at, uh, it's not exactly half of the family, it's like 4150, 4300, somewhere in that ballpark for a single individual, once I do those two things, then I start putting money into my 401K, I hit 25% before I ever get to the $23,000 threshold." So what happens at that point? Do I still?

• 2:10Speaker 03

  Still have to max out. Do I still have to, in order for me to move from step six, max out retirement accounts to step seven, hyper accumulation? If I hit 25%, can I then do that? Or do I have to max it out first?

• 2:23Brian Preston?

  Yeah, I, this is, you know, I've heard me tell this story, but a lot of you are brand new, so you, you don't, you haven't heard us tell these stories. So it's, it's important for, for me to make sure I, I share it. We were doing a speech to these engineers. About the financial order of operations. I'll never forget, we had a, a, a young female engineer raise her hand. And she goes, this seems cruel, that I don't get to get to the goals, financial goals, like fund my kids' college and other things. Until I max out my, my 401K here at the employer, which at the time was like 21, 22,000. Now it's 23,000.

• 3:04Brian Preston?

  And, and we were like, yeah, you're exactly spot on. The financial order of operations is an all-weather, all-terrain vehicle. Because we have designed it to where, to get from step six down to step seven, and then move on to step eight. You just have to reach 25% of your gross income. Because we do realize, some people are just gonna be not, their, their income's not going to be huge, but they're going to be very disciplined. And they're gonna be very efficient at saving money, but their income just isn't high enough. At the time, I think it was in the, somewhere in the 80,000 to 80 to 90,000 dollars. You're not going to reach the point to where you're going to hit the annual funding threshold of the 401K. That's okay.

• 3:43Brian Preston?

  You've still been so successful at saving. You can move on to step seven, hyper accumulation. That's where you go start thinking about your three bucket strategy, how you're going to use the money in retirement. And then even move on to step eight, which are those prepaid future expenses or abundance goals. That's where you start thinking about the kids' college. You've done the hard work. And I, I also, I want to give another big commendation. Congratulations for somebody who makes under six figures, hits 25%.

• 4:10Speaker 03

  Huge.

• 4:11Brian Preston?

  Do you realize that the discipline and effectiveness of that savings rate is incredible? And it's so incredible. Also, you're gonna be closer to the social safety net. So even, this is probably Probably gets even frothier in the future because you social security and other things. I get more nervous about people who prescribe that they think that they're financial mutants, but they make two, $300,000 a year and they're just not realizing just because you maxed out your $23,000 401k.

• 4:37Speaker 03

  23.5 this year.

• 4:38Brian Preston?

  23.5 this year. That's not enough to, you need to be thinking about 25%. And the other way on that one is to go beyond just your 401k or your 403B. You need to be saving more, but for skibbity boppity boo, this is definitely you're on the right path.

• 4:57Speaker 03

  What's, oh, what's so funny is after you read the question, I thought you were going to pause on the name, be like, Brian, are you okay? You got, are you okay? After you went through that? You got lost in the name on that one too. I love it.

• 5:05Brian Preston?

  You guys, y'all have to be careful. I really am a squirrel and when I see names, I get, that's why I had to thank, thank you, content team for leaving the question up because all I could sit there and I was like, that's a Disney reference, I think. It has to be a Disney because immediately when I see it all, I see a skibbity boppity boo.

• 5:22Speaker 03

  But it's not skibbity, is it? It's bippity boppity boo.

• 5:25Brian Preston?

  Okay, yeah, that's fine. You know what? Don't mess up, don't mess up my good time.

• 5:29Speaker 03

  Okay, that's fine.

• 5:30Speaker 02

  You know, I was honestly a little disappointed that there wasn't a reaction, but that, that was perfect.

• 5:34Speaker 03

  He was saving it. He liked to say, he likes to say the charity.

• 5:37Brian Preston?

  Well, no, here's what I'm like, poor, poor guys here. Everybody here who works, they know that I'm going to put some weird thing in there just because my brain is just wired. My, but don't screw up the video, Brian. Just, just keep it in check. Be disciplined on this part too. So that's, that was what was going on.

• 5:53Speaker 02

  No, I love it. Uh, you know what I also love?

• 5:56Speaker 03

  Tell me that.

• 5:56Speaker 02

  That almost 70% of the live stream audience has done their net worth statement.

• 6:00Speaker 03

  Yeah. It's like Christmas morning. What's so funny is we have some, uh, some folks here who said, hey, you know what? Hey, I've learned, found the money guy show, have started working, uh, at the firm and that we did our first net worth statement this year and we're like, that is awesome. Let me tell you the really exciting part. Uh, five years from now, after you've done this for a number of years, when you get to look back and see the progress and see how it's changed and see how much ground you can cover just by solid, consistent decision making and small tweaks, you will be blown away. I mean, I've been doing mine for We're getting close to 20 years now, right? Like it's rapidly approaching the 20 year mark and it is so fun to look back and just see

• 6:44Speaker 03

  how that has changed over time. And so if you've not done it, we have a great free resource you can use. You can go to moneyguy.com/resources or you can go check out our net worth tool. That has a full dashboard that puts front and center, all of those things that we tell you about. Okay. How are my tax buckets built up? What's my money guy multiplier score? How was my journey to abundance look? And you can actually track those things. So if you don't have a tool that you're using, I'd encourage you go to learn.moneyguy.com, check out your tool for those 30% of you that have not done it yet.

• 7:16Brian Preston?

  So Sunday, I was like, you know what? I have to show everybody, we eat our own cooking here. So I, we're, we're, cause I get back in town on Thursday. And then Friday, I had to spend the whole day taking down Christmas decorations. Do you know how sad it is when you come back in town and then, you know, it's so fun putting up Christmas decorations outside, but it took me a day and a half to take down all the stuff in the front yard.

• 7:42Speaker 03

  You get, that saddens you though?

• 7:44Brian Preston?

  Well, it's much more fun to put it up than it is to take it down. But so that was Friday and then half of Saturday was taking down all my yard scape for the, for the neighbors. And every year I think I'm going to dial it back. My wife is like, the neighbors are kind of counting on it. So I did that. So Sunday I told my wife, I was like, I have to, after lunch, I'll take, you know, my youngest daughter, we gotta go to my office because I've got to get my net worth done. And I felt like it was the most, most on brand, we eat our own cooking. Cause here, here, here's my Sunday, we're driving to the office. I pull into the UPS store, make an Amazon return. I'm like, yes, got some money coming back on the, the credit card for the Amazon return. Then we pass by the thrift store, the Salvation Army.

• 8:29Brian Preston?

  I make, I have the whole back loaded up. Now, look, it'd been much more tax efficient if we'd have made this decision in December.

• 8:35Speaker 03

  Sure.

• 8:35Brian Preston?

  So I could have deducted it for 2024. But we cleaned out the garage so I could put the Christmas in, some of it in the garage. By the way, I got overwhelmed by how bad the garage was and it still made it up in the attic. It didn't make it in the garage.

• 8:47Speaker 03

  Oh, was your goal to keep the Christmas in the garage?

• 8:49Brian Preston?

  Just the big yard scape stuff, the snowman that has the animation on it. It's just too big and I'm getting too old to carry this thing upstairs every year.

• 8:57Speaker 03

  It's going up and down.

• 8:57Brian Preston?

  I'm like, thank goodness I'm in decent shape for my age, but I'm like, you know, and, and. I won't even, I won't even get into the family discussions about why this thing is ridiculous that I'm carrying in the attic. But I put, so we cleaned the garage out for partially, not fully, but partially. So I pull in a Salvation Army, make a big donation, got the tax thing, I'm like, check. And then I drive to the office and I do my net worth statement. I was like, this is the most Money Guy day.

• 9:23Speaker 03

  It's a good Sunday.

• 9:25Brian Preston?

  To do this. And it was just good. I mean, I should have had a blizzard or something to celebrate, but I.

• 9:29Speaker 03

  But you're eating healthy right now, right?

• 9:31Brian Preston?

  Yeah. That New Year's resolution usurped that. But it's, um, yeah, but it was, it was a good day. And I would encourage everybody, do your net worth statement. Because I know the first year, especially if those of you who think it's going to be negative, or pretty close to zero, you're like, why does it even matter? Do it. I'm just telling you that there is something magical about being able to look back on this 10 years earlier. I started when I was 31. But I have an associate here who's pretty close to my age. He started when he was in his early twenties. I'm thinking about EB. And I'm jealous. Because, you know, do the behavior. And my wife and I were talking all over social media, there's all this manifesting language.

• 10:14Brian Preston?

  I don't believe in that stuff. But I will tell you what I do believe in, is if you start doing exercises and creating these good habits, there is something affirming, it's not manifesting, it's you just waking up a part of your brain that believes where you want to be and seeing a dashboard of what you have and what you don't have, or how much debt you've taken on. And it kind of turning into because you've woken something up, not because you just spoke a spell into, to existence. This can work for you too. So, so go out there and do the net worth. And I think you'll be surprised at what it can do for you.

• 10:47Speaker 03

  Love it.

• 10:48Speaker 02

  Love it. All right. Um, I don't think I ever gave Skibidi a Tumblr. So, Skibidi, if you would like a Tumblr.

• 10:54Speaker 03

  We're rusty.

• 10:55Speaker 02

  You can get one at [email protected].

• 10:57Brian Preston?

  I think Rusty, I think chaos is what people seek.

• 11:01Speaker 03

  But it's.

• 11:02Speaker 02

  All right, this next question is from Sam. They say, can you talk?

• 11:06Brian Preston?

  Thank you. Y'all chose an easy name. I can actually hear this question.

• 11:10Speaker 03

  You know, the number one like comment I keep seeing that you're getting on the jacket?

• 11:14Brian Preston?

  What?

• 11:15Speaker 03

  Major thriller vibes.

• 11:16Speaker 02

  It really is.

• 11:17Speaker 03

  And so here's what I did. I went and looked. Michael Jackson's thriller outfit. It was not actually.

• 11:22Brian Preston?

  Beat it. Now, Michael Jackson, just we'll get back to Sam. But you guys are the Beat It jacket. I'm old enough that these things were all and they were at the treasure chest. I think I'm trying to remember. What was the, what was the, the store at the mall that always had the Michael Jackson gear? They had the Z Cavaricci pants too, but the Beat It jacket had the metal on the shoulders. I thought that was the coolest thing ever. And then, then you had the thriller, which was the, the red with the black V that came down. All those things were.

• 11:53Speaker 03

  Wild is you did not have to look that up. You just pulled that out of the memory banks. Like that's locked in.

• 11:58Brian Preston?

  No, I mean, they, these are things that when I was a kid walking around the mall, I was like, man, if I just had unlimited money, I'd so own that. Now, I didn't own, it's just like, I've told you guys, even this, this is actual members only. So I'm sure some private equity company bought this old dead brand. It was like, hey, I bet there's some nostalgic people that will go buy this because they couldn't afford it when they were a kid. Because my own was like Players Club or something else. It was only the kids whose parents really loved them that bought them members only. You know, all the rest of us poor kids had Players Club or Members Select or some other makeup.

• 12:36Speaker 03

  Wait, so when did you? Mostly members, not mostly members.

• 12:39Speaker 02

  When did you buy this jacket? Because I just assumed that you've had it forever. Yeah.

• 12:42Speaker 03

  Oh, you thought this was a vintage back from then?

• 12:45Brian Preston?

  Oh, no, no, no, no, no. This is, I went to a fundraiser two years ago at my daughter's school and it was 80s night. And I decided to go all in on it. So I bought this jacket and then I bought some Air Jordans. And I, I tried to make the Air Jordans work, but my feet are just too wide. I got big old duck feet. And, and those Air Jordans, Nike doesn't do Air Jordans and it's hard to get a wide. So I even bought a wide, an shoe extender and I'm in there just cranking that thing, trying to make this shoe comfortable. And it just, it doesn't work. They're cool looking shoes though.

• 13:17Speaker 03

  Just not wide enough.

• 13:18Brian Preston?

  No, I'm in there just cranking on it and it just, my foot, my old duck feet don't work.

• 13:24Speaker 03

  So Sam, thank you for your question about was it beat it or was it thrill? Was that his question?

• 13:28Brian Preston?

  Well, this gets on the side. I always thought if I didn't grow up in a small southern town that couldn't afford to do school pools and stuff, I think I would have beaten my, I think I would have been the precursor to Michael Phelps.

• 13:39Speaker 03

  Really?

• 13:40Brian Preston?

  Well, think about my body. I have big old duck feet. I mean, huge wide, I have to do the double wide feet. I have a long torso, not long legs, I have long torso. You realize for swimmers, that's an actual good thing.

• 13:51Speaker 03

  That's a great, you can play.

• 13:52Brian Preston?

  So if I wasn't just, and I was always in backyard, I was undefeated. Like all my buddies, I could swim faster than all of them. I think in another day, another time, Olympic swimmer.

• 14:01Speaker 03

  Did you do swim team? Were you a swim, were you on the swim team?

• 14:04Brian Preston?

  Did you not hear where I grew up? Swim team didn't exist back then. It was backyard. It was my buddies swimming, you know, in the backyard. I was the fastest of them. But I have no idea if it is actually organized because South Atlanta, back in the eighties, there was no swim team going on. Swim teams? Swim teams?

• 14:22Speaker 02

  All right. So Sam's question.

• 14:26Brian Preston?

  Sorry.

• 14:27Speaker 02

  He says, can you talk about what the bucket strategy is and when we should start considering diversifying our retirement account to more than just target date funds?

• 14:37Brian Preston?

  Oh, he's mixed up. There's a few things in there. It's pretty cool.

• 14:41Speaker 03

  Those are two kinds of questions. Let me talk about the bucket strategy, Brian. You can talk about when, when it makes sense to graduate from, from target dates. So when we talk about building towards financial independence, we like for you to do it in three distinct buckets. We want you to have your tax deferred bucket. That's like your 401ks or your regular IRAs, IRA rollovers. We like for you to have your tax free bucket. That's your Roth IRAs and your HSAs and Roth 401ks. And then we want you to have your after tax bucket. That's just like your regular brokerage account that goes, has after tax money and then you pay taxes as the money grows and as you invest those dollars. Well, if you can build up these three distinct tax buckets, when you get to financial independence,

• 15:24Speaker 03

  you get to pick and choose where you pull your money from. So you, if you're in a high interest rate environment, you might pull up to a certain threshold from your pre-tax assets. To trigger ordinary income and then for the rest of your needs, you might pull from the Roth assets or from the after tax assets. And you can literally manipulate the tax code to pay the tax that you want to pay. So we have a ton of clients who have large seven figure portfolios that have six figure retirement needs and incomes and yet they pay the lowest tax bracket. They might be paying the 12% or 22% federal tax brackets because they built up their three buckets and that's how we actually built the financial order of operations. If you follow it through, you will likely build up those three buckets so that when you get to financial independence, you can

• 16:09Speaker 03

  pick and choose what taxes you pay. That's what we talk about. We talk about the bucket strategy. Now, the second part of the question that Sam had was, well, how do I know when to move away from targeted? Because the bucket strategy even plays into that a little bit in terms of not just-

• 16:25Brian Preston?

  The way I'd phrase it, I would have flipped this question a little differently because bucket straight, that is sexy stuff. I mean, if you think about that you're sticking it to the man on an illegal way to minimize your taxes, that sounds so good. And it's the same way the sexy sizzle is also in, hey, man, you realize that you can make so much money if you just invest in this one thing and it can be crypto, it can be whatever the popular thing is of the moment. But the reality is, is in the beginning, your savings rate and the habit of actually starting to save and invest is more important than even where you put the money. You've got to get, you've got to get the make wealth behaviors going and the habits going first before you get into maintaining

• 17:08Brian Preston?

  and maximizing those things. So that's why we, we tell people and people get upset about this. I'm like, no, you need to listen. Actually, sit down, listen to kind of what we're sharing because this will make a lot more sense. What I like about index target retirement funds is they first of all are taking advantage of index funds, which are low cost. They're super efficient and they capture what's going on with this awesome economy that is innovating and growing just naturally upon itself. Instead of you trying to choose the winners, you just choose, yes, I want to be part of this excitement that's going on. The target retirement part of it is it, it's helping you while you're young, be super aggressive. And then as you get a little bit older and your, your risk profile is changing,

• 17:50Brian Preston?

  it's getting more and more conservative. It's handling the asset allocation for you. So really, when you can marry those two together. It's really, you have to answer two questions. How much can I save? And when do I need the money? Then the rest, you don't have to get distracted. You don't have to focus or waste any mental horsepower on anything, but how do I save more? Into my investments? And then get into the financial order of operations and getting to step seven, hyper accumulation, which is where the bucket strategy really kind of comes into play. And that's kind of a great segue into taking on the rest of what Bo was talking about. I think that's when I think people kind of graduate out of index retirement funds.

• 18:31Brian Preston?

  Because now you have to start thinking about, hey, I have, you know, a lot of bond funds that I, I don't like bonds, even, even my mother-in-law, who's in her 80s, over Christmas break, was like, why do I have bonds? And I was like, oh my gosh. Bonds are not bad. They actually, let me show you what they've actually made you over the last few years. Just because you hear equity, equity, equity, and I love equities. And they've done really well over the past couple of months. But I was like, you have to understand that everything has a place in your portfolio. And you're going to, when you get to a point where you're trying to maintain your wealth and even multiply your wealth, you will want to, because you, it's not just risk tolerance, it's risk capacity and the ability to recover if markets came down. You're going to appreciate that you have some conservative holdings, but you want to make sure

• 19:15Brian Preston?

  you put those conservative holdings in the right bucket to maximize the tax planning as well. And that's why step seven of financial order of operations, all those things really kind of intersect nicely and will help you maximize your journey. But don't get the steps out of order. So many people are so drawn to the sexy sizzle that they skip steps and they never, they don't even get the make wealth and then reach the maintain. They, they just skipped it. They're already jumping into the, the risk aversion side of things without actually doing the, the make wealth phase.

• 19:49Speaker 03

  That's great.

• 19:50Speaker 02

  So Jocelyn's question was, what's the difference between financial assistance and financial enablement? Also, I picked up Millionaire Mission for Christmas and I have been loving it. P.S. Love the jacket.

• 20:01Brian Preston?

  Oh, please, don't, don't stop. You know, this is, I mean, let's, let's just go ahead. I mean, thank God it's a tumbler day. I'd feel really pressured to only give one tumbler out to-

• 20:11Speaker 03

  Just to Jocelyn. Jocelyn. So, okay, so what's the difference in financial assistance and financial enablement? We know, you know, one of, one of the formative books in our life was The Millionaire Next Door, and it talks about, you know, traits of millionaires. And one of the traits of millionaires is that not only did they not receive economic outpatient care from their parents, meaning their parents did not subsidize their lifestyle, they also raised kids who they did not have to provide economic outpatient care to. And for the quick, like Webster definition of economic outpatient care, it is a parent subsidizing the lifestyle decisions and choices of their child, meaning their child is able

• 20:54Speaker 03

  to live a lifestyle at a higher means than they would be able to otherwise on their own. That is different than, uh, parents who have had some success, had some wealth, uh, done things right, creating an environment where their children can then also continue to benefit from those wise choices. We actually love seeing scenarios where financial assistance takes place. I'll give you a great example. We have some wonderful clients we work with, uh, and their, uh, kids did great in college. They graduated with impressive degrees, they got great grades, they were working through college, saved up money for a down payment, and they had done everything right, but when

• 21:38Speaker 03

  they came out of school, was right after real estate prices had just gone through the roof. And also, interest rates were at like seven and a half, eight percent. And so the kids were like, man, I really want to buy a house, but I want to make a wise decision, and I want to make sure that I keep it inside the realm of affordability, and I know that I need to at least put three to five percent- Now, and I can't have my mortgage payment exceed 25% of my monthly gross income. And if I try to go buy a house right now, I can't do that because of where interest rates are. Well, their parents said, hey, look, you've done everything right. You've, you've done everything you're supposed to, and we are in the position, we're in the place where, hey, we're not going to just go buy a house for you. We're not going to do that, but what we will do is we'll hold the mortgage for you.

• 22:20Speaker 03

  We will be your mortgage holders and we're going to charge a reasonable mortgage rate. 4%, 5%, something that's historical average. That you're still going to have to do the hard work of going out and earning, uh, living and paying your mortgage and satisfying this. And we're going to provide some assistance to, to utilize the resources that we have. But it's not going to be something where you don't also have to do hard work. I think that's a great example of financial assistance, not financial enablement. What would you add to that?

• 22:52Brian Preston?

  I thought, look, here, I immediately wrote this down and I think it works because we have assistance enablement. I think enablement is give only, and let me give you an example. And we live in a very affluent area here and it drives me crazy when I see people give their 16, 17 year old kids really nice cars. That is enablement to me. Compare and contrast that to assistance, which is like my oldest daughter, her, her first car, she paid for half of it. Uh, you know, look, it was, a lot of people said they didn't have all the safety features that brand new cars. And I guess you have to balance that, but it was teach with incentive, meaning that I said, whatever you save up, I will match dollar for dollar to put in.

• 23:34Brian Preston?

  It's the same thing with buying stuff for your kids, enabling things versus giving an, teaching with an incentive like Roth IRAs. When your kids start working, when they're 14, 15, 16 years of age and they get those first earned income dollars coming in their life. If you offer them a dollar for dollar match into a custodial Roth IRA. What do you think that's doing? That's priming the pump of good behaviors. And that's why teach with incentive is a very valuable thing. That's assistance versus you just giving somebody something and, and that, I think. That can breed entitlement, it can breed where you are. And we've talked about this, it's a hazard. Why? I think kids who grow up in wealth, they need scarcity. I know that sounds mean to say that.

• 24:20Brian Preston?

  When you're poor, when you're poor, you get scarcity all you want. It's an all you can eat buffet of scarcity. So it creates some things inside of you that is disciplined, it wakes up some things and that adversity is good for you. If you grow up in a, where abundance is everywhere, sometimes that can, we've had people come in our life where they say, my best years were the years I lived with my parents. That is horrible.

• 24:42Speaker 03

  It's been downhill since then.

• 24:44Brian Preston?

  If you're buying your kids a BMW when they're 17 years of age, where do they go from that?

• 24:49Speaker 03

  That's right.

• 24:49Brian Preston?

  Whereas, and I think about my cruddy car, I almost said a different word, my cruddy car when I was 16, that barely cranked, and then I got that first Mazda. And then I think about after I got married, and we bought that Ford Explorer that was still used, but it was just nice. It had leather seats and I was like, whoo. These, now, look, it had 100,000 miles and the rearview mirror fell off and there was all kind of other issues with it. But I remember the joy that buying, and then my first real new car, after I had built up enough assets in my 30s, that I bought a brand new car that had all the chemical smells that I got to breathe in and probably take a few years off my life.

• 25:28Brian Preston?

  But I loved it. That's the type of stuff I'm talking about is teach with assistance versus if you give them everything, I think you have to be careful that it becomes entitled, or you're giving them the best years while they're younger. And maybe people are gonna be bothered by this, because I know a lot of my neighbors, they don't, they know what I do for a living. They don't listen to a word I say, because they all buy their kids brand new cars. But here's the exception to the rule. Cause you're like, how does this fit in? You got enablement, you got assistance, and I got enrichment. I do think memories over stuff. I think if you can take, if you are living in abundance, take your kids on trips, do things like that. Cause I think that stuff is forever and it's actually enriching to do some memories over stuff.

• 26:12Brian Preston?

  Those are the kind of balancing act I would give, but don't, don't sleep on the fact that scarcity, if you grow up in abundance, is an important thing.

• 26:21Speaker 03

  I love it.

• 26:21Speaker 02

  I love it. Uh, Jocelyn, if you would like a Money Guy Tumblr, you can email [email protected]. All right, we've got a question from Music 80s.

• 26:32Brian Preston?

  They came up with that, I wonder why?

• 26:35Speaker 02

  Very on theme for today. What are your thoughts on using a 35% to 40% down payment on a home to keep the mortgage affordable versus investing and continuing to rent? Homes are near $500,000 on average in my area.

• 26:52Speaker 03

  Unfortunately, it may be necessary. We tell people that all the time, but we get this asked this all the time. Hey, I live in a high cost of living area. And if I do the 3% to 5% that you guys suggest when it comes to first time home purchases, and I calculate what my mortgage payment and housing costs will be based on that 3% to 5% down payment where interest rates are now, it's way more than 25% of my gross income. And unfortunately, a lot of times we have to say, well, there's a few things that you might have to do. Either you might have to have a larger down payment, you might have to figure out how you increase your income to be able to afford that mortgage, or you might have to be able to find a less expensive house.

• 27:35Speaker 03

  Well, one of the things, especially depending on the area you live, the only real lever that you can move is that down payment. So we see this all the time. Someone says, hey, 3% to 5% won't get it done, or even 10%, 20%. In this case, it sounds like maybe even 20% won't get it done. You might have to go to 35% or 40% to get it affordable. That may be what you have to do if homeownership is one of your top goals. Now, the thing that I would caution you on, and the thing that I want to make sure you measure is, what would be the opportunity cost of that decision? So this is where you have to do like some deep soul searching, say, okay, when I line up my financial priorities, how would I prioritize them? Is financial independence a top priority? Is homeownership a top priority?

• 28:19Speaker 03

  Is staying in this location a top priority? Is the school district a top priority? Whatever the thing may be. And you have to recognize that the ability to save up a 35% to 40% down payment to be able to get into a home, to afford the home. Is a noble goal, but there's going to be a cost of you not building and saving dollars for the future that might be helping you move towards financial independence. And you need to recognize that if I make the decision to do this, I may be sacrificing something on this side. And that's neither good nor bad. It's neither right nor wrong because money is nothing more than a tool that allows you to achieve your financial goals, but you just need to be very clear on what those ultimate financial goals are.

• 28:59Brian Preston?

  I would encourage you, you need to go check out one of our resources. Go to moneyguy.com/resources and we have a home buying checklist because there's really a push-pull system here. We came up with the 3% to 5% down payment just because we have a no hypocrite policy here. And I think about my first home purchase, I put down 3%, 5%. Beau put down 3% to 5%. We went and asked all of our CPAs and CFPs on staff, the majority of them only put down 3% to 5% too. And we're like, well, why in the world are all the talking heads out there telling people to put down 20%? It's just not right. It's hypocritical. If this is not what's really going on in the world, we need to have a rule to explain that most people who are good with money actually are on their first house to get on the homeownership train are putting down smaller than 20% down payments.

• 29:44Brian Preston?

  Now, the caveat on that is, this is why the home buying checklist will help. If you bought too big of a house and your monthly, if you take your mortgage payment plus the expenses on the house and it's blowing up your lifestyle where you're house-rich but life-poor, you can't save for the future, you can't even go out and enjoy a meal for your anniversary or your birthday, you probably have done things wrong. So that's why you have to have a system there that says, okay, in addition to the down payment, what is this as a cost to my cash flow? And it's why it's 25%. Now, I know those of you who live in high cost of living areas, I get it. If you don't have car payments, you don't have other debt, maybe that gets pushed up a little bit higher because you're doing public transportation and other things.

• 30:28Brian Preston?

  But for most people, that is a good rule of thumb so that you just don't let your eyes get bigger than your wallet and what your wages and your income is actually going on. So that's why I say those two things work in conjunction. Connection with each other. There are some people though, when you upgrade, you're realizing, hey, I, the 25% of my income is the restriction. And that's where I like people probably putting down a bigger down payment as long as, once again, we come back to what do you do with your next dollar? That's more of a step eight prepaid future expenses, abundance goals, because now you're increasing your lifestyle for your benefit, not just to get on the train of homeownership.

• 31:09Brian Preston?

  This is because you're saying, hey, I'm going to buy a house bigger than what my income can justify. So I might need to put down a bigger down payment so that 25% restriction is keeping me in check. But I don't want you to not fund your Roth, all right? I don't want you funding your 401k because you have this house at all costs mentality. So that's why those things have to work in connection with each other. I just, it does break my heart to hear people who can't get into homes, even starter homes are half a million dollars. That's why the 35% and here's another guidance I would give you. I, I remember I, I worked with, or she was a friend, a young attorney who was basing all of her decisions off of another financial person

• 31:53Brian Preston?

  who was saying, don't do this, don't do this. And I was like, you realize in the next three years, your income is going to be up probably 50% more than it is today. Make sure that yes, you need to be conservative in your planning, but also take into account where you are in this journey. That's why we give you these no hypocrite policy rules. So you can actually look at your life in full zoom out scope of where you're going. Now, don't use that as, well, I'm going to go buy the $3 million house because I think down the road I'm going to be making seven figure. No, that is not what I'm talking about. But I'm saying if you're a person, an engineer, if you're an accountant, if you're an attorney and you're basing all your numbers off of $65,000 a year, but in three years you're going to be making $110,000 a year.

• 32:37Brian Preston?

  You do need to balance these things, still work within the confines of the order, financial order of operations as well as our housing checklist, but understand how all these things work together. Nobody ever explains the math and that's why we try to do the Money Guy Show so that you can actually see how the mindset intersects with the financial math calculations that you're doing.

• 32:57Speaker 03

  That's great.

• 32:58Speaker 02

  Wonderful. All right. Thank you so much, Music80s, for your question. If you would like a Money Guy Tumblr, you can get that at [email protected]. And thank you so much to everybody for tuning in today. It was a great first stream back for the year. You can go to moneyguy.com/resources slash resources to find any of the resources that we talked about today. 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 where you can track it from year to year.

• 33:31Brian Preston?

  No, I love it. That's what I was gonna tell everybody. Get out there, make the most of 2025. This is also the great time to clean up 2024. You can still make those funding contributions for your health savings account, your Roth IRAs. Go check into those things because you have until April. This is a great time. Beginning of the year is a hot time of the year for us because we know a lot of New Year's resolutions and a lot of people are focusing on their finances. And we're just happy to be here because there is a better way to do money. And that's why we love inviting people to come hang out with us every Tuesday at 10 a.m. And then check out all of our new content. We have new content coming out on Wednesdays. We have new content coming out on Fridays. We have, we are loading you up because we are absolutely on fire. And there's so many cool

• 34:15Brian Preston?

  announcements that are coming out. Early February is gonna be so exciting for a lot of our Money Guy family. I won't because they'll start hitting me and then tackling me and not letting me say more. But this is going to be the year, if you want to get your financial life in order, we got you covered. I'm your host, Brian Preston, Mr. Bo Hanson, for the rest of the content team, Money Guy team, out.

• 34:36Speaker 03

  The Money Guy Show is hosted by Brian Preston 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. All investments involve a degree of risk, including the risk of loss.

• 35:16Speaker 01

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