The Personal Finance Podcast - 4 Dead Simple Steps to Become Financially Free

Starting point is 00:00:00 On this episode of the Personal Finance Podcast, for dead simple steps to becoming financially free. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we are diving into four simple steps to becoming financially free. If you guys have any questions, make sure you join. the Master Money newsletter by going to mastermoney.com slash newsletter. And you can respond to any of those

Starting point is 00:00:41 issues of that newsletter coming out with your question. And you may get your question and answer on the show. Also, if you're getting value out of this podcast, consider following on Apple Podcast, Spotify, YouTube or whatever your favorite podcast player is. And if you're really getting any value out of the show, consider leaving a five-star rating and review on Apple Podcast, Spotify, or your favorite podcast player. Now, today, I'm going to go through four. or dead simple steps to becoming financially free. Many listeners to the personal finance podcast, their number one goal is financial freedom.

Starting point is 00:01:14 They want to be able to do what they want, when they want, with whom they want. And so the reality of this is you need to know some of the simple steps to get the ball rolling and to get started. Recently, we just talked about how to figure out your Coast Fire number. And today, I'm going to give you some steps on just how to figure out what your retirement number is and how to get on track.

Starting point is 00:01:35 to ensure that you can become financially free. And so in this episode, my goal is to simplify this as much as I possibly can so that you know some of the math and some of the metrics that you need to be doing in order to achieve all of your goals. Now, in reality, for many people out there, if you're listening to this podcast and you're driving to work, or if you are working out right now, or if you are on your morning commute,

Starting point is 00:01:59 or if you're sitting in your office or your cubicle, or you're at your desk working, you probably want to have more control. you probably want to have more freedom. And the way to get freedom is to take action with your finances. See, money is this tool, and you can utilize this tool in a way that is going to allow you to achieve financial freedom by putting more of your dollars towards your investments, putting more of your dollars in the right places.

Starting point is 00:02:22 And once you realize that this is possible, that lightball moment will absolutely change your life. This could be that moment. This could be the moment where you decide, I'm actually going to change my life today. I'm going to transform my finances today. In fact, I'm going to build generational wealth for me. I'm going to build a generational wealth for my family. A wise man leaves an inheritance to his children's children. That's from the book of Proverbs.

Starting point is 00:02:45 And I want you to understand that you can really make a huge impact on your money just by taking a few of these steps. So what I want you to do when you listen to this episode is I want you to take this seriously. I want you to realize, okay, if I do this stuff, if I actually figure out how to make this work, all of the sudden, these tactics and these tips are going to allow me to achieve financial freedom and move towards that goal. If you want that, I'm ready to show you how. So without further ado, let's get into it. Step one is we're going to figure out our financial freedom number.

Starting point is 00:03:18 Now, many of you who are longtime listeners to this podcast probably know how to figure out your financial freedom number. But if you've never done it before, I'm going to give you a simple calculation with numbers that you can see every single month. In fact, you probably know these numbers like the back of your hand. If you look at your monthly income right now, and if you feel as though, okay, this is the number that I want to live on for the rest of my life. I'm okay living on this number for the rest of my life. I want you to take your monthly income and I want you to multiply it by 300. Okay.

Starting point is 00:03:48 So let's say, for example, that you make $5,000 per month. If you make $5,000 per month and you multiply that by $300, all of a sudden you're going to see you need $3 million in order. to be able to retire. $3 million inside of your portfolio. Now, this may sound super simple, but this is backed by something that has a ton, and I mean a ton of studies that have been done.

Starting point is 00:04:12 And this is called the 4% rule. The 4% rule basically states that you can draw down 4% of your portfolio every single year and preserve that portfolio throughout retirement. So when they did the studies, there's a study called the Trinity study where they looked at the 4% rule and it went through a bunch of different scenarios.

Starting point is 00:04:31 But it looked at a 60-40 portfolio, which means 60% stocks in that portfolio and 40% bonds. And they pressure tested this, and they stressed tested this through a bunch of different market scenarios. And it came out that this had a very high probability of success. And so when you reverse engineer the 4% rule and you do a little bit of math, you realize, oh, you could do this on your monthly income. So if you take that monthly income, multiply it by 300, that's going to get you your financial freedom number. Now, this starting point gets you a really good position to think through

Starting point is 00:05:03 how I want to achieve this. How am I going to get to this goal? Well, one of the best ways to do this is to automate your finances, meaning automatically investing every single month in the accounts you need to prioritize. Now, we talk a ton to our members in Master Money Academy about which accounts to prioritize based on their financial situation, but you need to figure out and identify those accounts and which ones work for you. And so you can do this at Fidelity, you can do this at Vanguard, you can do this at Charles Schwab. We have some of our favorite accounts linked up down below if you want to check out our favorite brokerage accounts. But what you want to do is you want to look at a way where you can auto invest a piece of every single paycheck. What happens when you do that? Well,

Starting point is 00:05:45 immediately, all of a sudden, you're building wealth on autopilot. You don't have to think about it anymore. And instead, you can automatically invest your dollars so that they are going to grow by themselves. Many of you out there may have a 401k. You may have a retirement plan that you have used for a long time. And maybe you have a forgotten about 401k. Have you ever logged back into your 401k after a couple of years and said to yourself, wow, I've got way more money in here than I ever thought I did. The reason for that is because you automated your money into those accounts. And so really, every aspect of your finances should be completely automated. And so, So when we think about investing, we want to make sure that we are sending those dollars every single month from our bank account when that money hits to our investments.

Starting point is 00:06:31 So let's say, for example, that you get a paycheck and your paycheck is $2,000. And you decide, okay, I want to make sure that I'm investing a percentage of my income. Maybe it's 10%, maybe it's 20%, maybe it's 30%. Well, let's just use 20% as the quick number. Well, when you do that, then you can send that money automatically, 400 bucks, every paycheck, over to your investment account, wherever you are investing those dollars. And when you set these up, most of these brokerages will also allow you to set them up where you send the money automatically and it auto-invests in the investments that you wanted to go into.

Starting point is 00:07:05 So if you wanted to invest more in VTI or VO or QQQM or whatever you wanted to invest in, you could send some of those dollars over automatically and they will get invested in the market. you don't have to go and log in and try to remember to an auto invest in those investments. No, it'll do it for you. In this day and age that we are living right now, every single person listening to this podcast should be auto investing. If you're not auto investing, join Master Money Academy. We literally have a course inside Master Money Academy, and we just did a live challenge of

Starting point is 00:07:40 auto investing. And we had all of our members go through this three-day live challenge with me. They could ask me questions on how to automatically invest their dollars. The next thing is let's look at our accounts and let's figure out which accounts we want to be automatically investing in. So we're thinking about things like the HSA. We're thinking about things like the Roth IRA, the raw 401k. We're going to do a full episode on my updated order for investing because I think this is a very important conversation to have. There's actually an account that I'm moving forward in our updated accounts for investing based on some law changes and some tax law stuff

Starting point is 00:08:14 that I want you to hear. So make sure you subscribe to this. podcast if you're not, because I'm really, really excited for that. But first, you need to make sure that you're getting your 401k match. If you are not taking advantage of your 401k match, you are leaving free money on the table. In fact, many people who do not take advantage of their 401k match could be losing out on six figures. Let me give you an example of this really quick, and I want you to think about this. Let's say, for an example, your employer matches all the way up to 5% of the amount that you contribute to your 401k. Okay. Well, you put 5% into your 401.

Starting point is 00:08:47 Now your employer is also putting 5% into their 401k. That means that literally you are investing 10% of your income in your 401k off the top. That is absolutely incredible for just putting 5% in. This, my friends, can compound tremendously long term, and you can count that towards your savings rate. Isn't that fun? It's really easy to build wealth when you understand the little low-hanging fruit that you can take advantage of. If you take advantage of a 401k match, that is the lowest possible hanging fruit that you could take advantage of.

Starting point is 00:09:21 And when you do that, you are automatically getting yourself in a position where if you have a long enough time horizon, that's a six-figure, if not seven-figure decision for all my really young folks, it could be a seven-figure decision when you take advantage of that 401 match. But then you want to look at some of the things like Roth accounts. Maybe it's a Roth 401k. Maybe it's a Roth IRA. these are really powerful accounts that if you start to max these out over the course of the next couple of years, you could have a tremendous amount of money. I just did a live stream where we were live talking about the Roth 401k and someone asked me a question who was 25 years old and said, hey, should I max out my Roth 401k every year? So we did a fun little exercise with this and I said,

Starting point is 00:10:03 well, let's run the math. Let's do the numbers and see what would happen here. If you put and maxed out your Roth 401k from the age of 25 to the age of Every single year, you made sure you contributed $24,500 per year. That's the max every single year for the Roth 401k at the time I'm recording this. It goes up in future years, by the way, because over the course of the last couple of years, it's gone up and adjusted for inflation and all those different things. But if you put $24,500 per year into your Roth 401k, guess what's going to happen over the course from age 25 to age 65? You'd have $10,800,000 in that account.

Starting point is 00:10:42 with a 10% rate of return. Now, here's the amazing part. Guess how much that person would have contributed? About $900,000. So almost $10 million of it, just under $10 million of it, would have been completely tax-free. You would not pay a dime of money on those taxes.

Starting point is 00:11:02 So let's think about this for a second. Let's say you're in the 25% tax bracket and you didn't pay a dime of taxes on $10 million. That means you saved $2.5 million. on taxes that you just, poop, put it right back into your pocket. That you got to keep in your portfolio and it got to continue to compound over time.

Starting point is 00:11:23 That, my friends, is the power of tax-free growth and taking advantage of a Roth account. And I cannot explain this enough. There's opportunity cost involved with that tax-free growth. There is peace of mind when it comes to that tax-free growth because you do not have to pay taxes on those dollars again. So if, for example, the government, government changes the rules on the tax code, all of the sudden you have that money available where

Starting point is 00:11:47 you don't have to pay taxes on. You don't have to worry about that. You don't have to worry about RMDs, things like that. So it's very, very important to make sure that you understand compound interest, how it works in these accounts and which accounts are going to work best for your situation. But let's say you're a really high earner. We got a lot of really high earners who listen to this podcast. If you're a high earner, you may want to consider something like a 401k where you get that tax deduction in a given year. Why? You could be saving yourself thousands of dollars every single year by making sure that you take advantage of the 401k. Maybe you're someone out there who has a high deductible health plan and you know there's triple tax advantages when it comes to the HSA.

Starting point is 00:12:22 Well, that could be a great account for you when you're trying to achieve financial freedom. And if you're trying to retire early, the taxable brokerage account is still a powerhouse account. Boy, oh boy, do I love it even more every single year because of all the cool rules that are coming out where you can look at someone married filing jointly and it's like $99,000 plus the standard deduction. It's like almost $130,000 that you would have to make before you started paying taxes on a taxable brokerage account for long-term capital gains. Boy, oh, boys, there's some fun stuff that we could talk about here. So we are going to have an episode talking through the updated. We'll go through each of those different accounts on a deep dive so that you guys can understand kind of how

Starting point is 00:13:00 I'm thinking about this, some of the things that we are doing. And in Master Money Academy, if you have questions on this for any of our members there, make sure you ask those questions. We'll dive deeper into it because I'm in there every single day helping you guys out. All right. Then when we have this freedom number in place, so the first number we tracked was our monthly income times 300. I want you to track this on a yearly basis. Why? Well, I don't care if you're 25 years old. I don't care if you're 30 years old. I don't care if you're 35 years old and still way out from retirement. I want you to track your freedom number on a yearly basis because of a couple of different things. One is inflation. We want to make micro adjustments to this number. I don't want you to get to the point in time where you get to the end of your life and you realize I didn't adjust for inflation properly. I didn't run these. numbers properly and so you're all stressed out and worried. No, instead, we need to make micro adjustments on a yearly basis so we don't have to do these big massive adjustments long term. So if the inflation rate was 3% last year, increase your contributions by at least 3%. So you can keep the same

Starting point is 00:13:55 buying power going. You can keep the same buying power within your portfolio and your account. Now, if your company gives you inflation raises, always put those inflation raises towards your investment account so that you can keep and maintain some of that stuff. I think it's really important to do that. Many people don't know that hack, but inflation raises should be going towards, for the most part, your investments and some of your lifestyle as well. But making sure that you increase those accounts by at least the rate of inflation every single year is important. Also, as you start to approach retirement age, maybe you started to acquire a rental property or two. Maybe you have a business that's doing better. Adjusting your freedom number is going to be important for lifestyle

Starting point is 00:14:35 changes as well. So one of the things I like to talk about when it comes to this is when you you start to think through how you are building wealth with your freedom number. Here's an example, okay? I want you to think about this example in a way that makes sense for your entire life. I want you to think back on your life and how much change over the last decade, for example. Maybe you had kids. Maybe you got married. Maybe you started a brand new job.

Starting point is 00:14:57 Maybe you were in college or high school 10 years ago. Maybe you were in your 40s. Maybe you were in your 50s 10 years ago. And you're starting to figure it all out now. But look how much your life has changed throughout the last few decades. And how much has shifted over the course of the last five years, seven years, ten years, your life is going to change and your goals are going to change. And by tracking this on a yearly basis, this means you can make micro adjustments to it

Starting point is 00:15:21 where it's not ripping off some big band-aid and you have to stress out about your money all the time. No, let's just stay on top of it so we don't have to worry. I want to remove worry from your life. That is my goal is to remove that financial worry so you don't get hit with random anxiety attacks when it comes to your money. I want you to be cautious and profitable when it comes to this. So those are just some of the things I want to talk about with step one, is making sure that your monthly income times 300 helps you reach your financial freedom number.

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Starting point is 00:17:13 sponsored jobs. If you've watched the video version of this podcast lately, you've probably noticed the wood slat wall behind me here. Now that's actually one of my favorite upgrades we've made and we got it from Wayfair. I wanted something that looked clean, professional without spending a fortune or making the project overly complicated. And the slat wall completely changed the look of the studio and it's now the backdrop for every single episode we record. You're probably looking at it right now if you're watching on video. And one thing I appreciated was how easy Wayfair made it to compare options. Between the customer reviews, real photos, and Wayfair verified products that are hand-vetted for quality and durability, I felt confident I was getting something that would

Starting point is 00:17:52 look great and last. And if you're planning a home project of your own, Wayfair Rewards gives you 5% back every day, making those upgrades at an even better value. So join Wayfair Rewards today to get 5% back on every purchase and start saving on your next home. upgrade. Head to wayfair.com to shop all things home. That's W-A-Y-F-A-I-R.com. Wayfair, every style, every home. Wayfair, every style, every home. Now step two, as I want you to take that same monthly income, and I want you to multiply it by 0.2. This number is going to give you your minimum monthly investment. So if you want to achieve financial freedom, I want you to at least invest 20% of your income or more. In reality, in reality,

Starting point is 00:18:39 We want you to get to this point in time where you are increasing it all the way up to 25, 30% plus. But if you are someone just getting started, 20% is the number we want you to ultimately get to. Now, you may be saying to yourself, how in tarnation am I going to be able to save 20% of my income? I am just figuring all this out and it feels like everything that I make goes to bills or goes to my lifestyle expenses. My friends, I'm going to show you exactly how to do it. First, I want you to start investing as much as you possibly can. Now, this could be 10%, this could be 5%, but we're going to find low-hanging fruit to help you get to the point in time where you can then invest a little bit more. Now, the key here is when we start to think about this, we want to make sure this money is coming out first.

Starting point is 00:19:24 If we can get it out of our hands, meaning out of our checking account and putting it towards our investments, this is going to be super helpful to ensure that it actually happens. I want you to treat this like a bill. This is a bill that absolutely needs to happen. And if you have the discipline to treat it like a bill, all of a sudden you're going to realize, wow, I can actually do this. And maybe I'm just overspending in some areas. Maybe I have some leaky buckets that I just need to patch up. And if I patch those things up, I can absolutely do this. Or maybe you have to make a couple of tradeoffs in order to make sure this happens.

Starting point is 00:19:53 But I highly encourage you to really look into saving and investing 20% of your income because this is how financial freedom can be achieved in less than 30 years. And really, this is where you can start to get full control. of your money. So first thing, when your paycheck hits, try to take that 20% out. If it's way too far of a stretch and you're like missing out on food or bills or things like that, let me give you a couple exercises to do. First, let's try to find a way to increase our income by 10%. So if you make 50 grand per year, can we make another $5,000 per year in another way? This is going to help you, A, be able to take those extra dollars and put them towards wealth building activities, investing, paying down debt, emergency fund, those types of things. Secondly, let's find those leak.

Starting point is 00:20:36 and let's try to cut back expenses 15%. So maybe you spend a little too much on groceries every single week. I know I do. That's one of the areas that I have to go back and re-center and refocus and reconfigure so that I know that I'm spending optimally on groceries. And I think many people out there do the same. You could do a number of different things like making sure you do online orders from Walmart or wherever you shop.

Starting point is 00:21:03 You could shop at Aldi to make sure you're reducing those costs. on groceries. And so there's a lot of things that you could do here where really, and I mean, in reality, you can make a tremendous amount of progress if you start to think through that. Maybe you have a ton of different subscriptions you could cut back. Maybe you've got a bunch of stuff in your house. You don't need any more. It's completely cluttered and you can start to sell some of that stuff. But there are some things that you can do right now to really make a big difference and find some of those leaks. Another thing you could do is you can adjust something like your W4 withholding, where if you feel as though you get a big tax return every single year and you're like, why do I always get this

Starting point is 00:21:39 big tax return? It's awesome. Yeah, I'm going to spend it all, but why do I get this big tax return? Well, you can adjust your W4 withholding to make sure that you are spending less on taxes and you get closer to the actual number so you get no return. So you're not giving the government a free loan. That's another way that you could think about this so that you can increase the contributions that are going towards investments throughout the year instead of waiting until tax time every single year and taking that big thing. Now, if tax time and that big return, forces you to invest those dollars. If you're disciplined enough to do that,

Starting point is 00:22:09 then maybe it's a forced savings account for you. But for most people, I would rather you put it towards investments early and often. Because, like, for example, the market this year alone has returned over 20% in my portfolio. And so for a lot of you out there, you can be missing out on a lot of gains just by adjusting that W-4 withholdings. Also, any windfalls that come into play, bank those things, put them towards your investments if you're not hitting the 20% yet, if you got a raise, if you got a tax refund, you got a windfall.

Starting point is 00:22:37 Making sure that some of those big things coming in, get put towards your financial freedom. If you care about financial freedom, your dollars are going to follow. If you really care about financial freedom, you're going to vote with your dollars that I want this financial freedom. And so you're going to do the things that matter to make this happen. And so I really want you to think through how you want to go about that, okay? But this is in the reality of how I want you to think about this. There's a lot of things you could do.

Starting point is 00:23:01 But once you track your monthly income and multiply it by 0.2, that is the minimum on monthly investment I want you to get to, okay? If you want to invest 25% of it, multiply it by 0.25. If you want to invest 30%, and you get the picture, you know basic math, 0.3, okay? That's how we're going to figure out the percentage that we need to be investing every single month. I'm trying to simplify this for you guys as much as possible. Because when you think about this, your monthly income is the thing that you see every

Starting point is 00:23:27 month, and I want you to make sure that you're doing this. The next thing I want you to do, step three, is I want you to take your monthly expenses is and multiply them by six. What is this going to give us? This is going to give us the ultimate amount that you need to have in your emergency fund. And you may be saying to yourself, okay, perfect, but I don't know what my monthly expenses are. You got two options then. You can either track your monthly expenses or you can do the same formula but with your

Starting point is 00:23:54 monthly income and you can then just have a little bit of extra in your emergency fund as you start to progress here. But if you don't know your expenses, I'm going to show you how to figure out what they are. First, is you can pull out your last three months of bank statements and you can add up the expenses for those last three months and divide by three. I've done this a number of different times. I do this a lot of times every single year at the end of the year is I will pull like a spreadsheet, a CSV of my bank statements, and then I will take that number and divide it by 12.

Starting point is 00:24:22 That gives you the average of what you are spending on a yearly basis month by month, okay? That gives you one burn rate that you can utilize. And many of you may be saying to yourself, yeah, but you know, the last couple of months, they've been really crazy, there's been a lot of expenses going on, guess what? That's going to happen every single month. That excuse just doesn't work anymore because for many of us, you're going to have those irregular months. You've got to make sure that you're doing what happened over the course of the last three months. If you want to stretch it out to six months, it's even more accurate. If you want to stretch it out to nine months, it's even more accurate. And so this exercise does not

Starting point is 00:24:55 take long, especially if you just pull your bank statements, you can go look and see how much you're spending. Then, if you feel as though you are overspending in areas, you're doing this exercise, then you can start to highlight things you want to cut out, and that is a great time to do it while you're starting to do this exercise of figuring out what your emergency fund needs to be. Now, when you build out your emergency fund, we have something called the one-three-six method, where I teach you how to simplify this and how to build out your emergency fund in phases. So it's not one big daunting thing where you have to save six months of expenses. How the heck am I ever going to do that? Let's do this in phases, okay?

Starting point is 00:25:31 First, I want you to build up the one. That is one month of expenses. inside a high yield savings account. If you want my favorite high yield savings accounts, they are linked down below in the show notes. Make sure you go check those out. There's some great ones out there. I love SoFi and Ally right now. There's a bunch of other good ones.

Starting point is 00:25:47 CIT Bank has had some really high rates as of late. But go check those out. And you want to put this in a high yield savings account because you're going to get 100x what you would get at a Chase or a Wells Fargo or a Bank of America. Those are banks that I am not interested keeping my savings in. You can do checking if you want to. but in my savings, that's not what I'm interested in whatsoever, okay?

Starting point is 00:26:07 So that's the starting point right there, is making sure that we utilize that. Then as we start to think about this, and as we get to the point in time we have one month of expenses, we want to pay off any high interest debt that you have, any debt above a 6% to 7% interest rate, let's get rid of that, like credit cards, like personal loans, like student loans, those types of things. If they have a high interest rate, let's get rid of those, okay? Then we get to three months. So you've already got one month of expenses built up.

Starting point is 00:26:34 Now we want to build it up to three months of expenses. This is going to allow us to really take care of a lot of things that could happen. If your kids get hurt, you know, they break their arm and you got to take them down to the ER and you have a $500 bill that just popped up out of nowhere and you weren't anticipating it, the three-month emergency fund takes care of it. Or if your car breaks down, you need new brake pads and all of a sudden you got a leaky oil pan and this is going to cost you $2,000, well, that three-month emergency fund is going to help you take care of that. Or if you have, you know, a water here that goes bad and all of a sudden,

Starting point is 00:27:04 all of a sudden it floods your entire garage. Well, you've got the money there to help take care of that. This, my friends, reduces stress and anxiety with your money. So then you can build wealth intentionally and not make decisions out of scarcity, not make decisions out of a place or a position where you feel as though everything is stressful. No, I'm going to remove that stress from your life. And I am going to put cash on hand there with that three-month emergency fund so that you can make these choices that are actually going to be beneficial for you and your family.

Starting point is 00:27:34 I want you to build generational wealth for you and your family. And the only way to do that is with something like this emergency fund. Okay. So that's how we're going to think about that is to three months. Once you get to three months, I want you to split it off, half to investing, half to emergency fund until that emergency fund gets all the way up to six months. This is going to allow you that over the long haul and over time, you're going to build an emergency fund that's going to protect you against the ultimate

Starting point is 00:27:57 thing you don't want to happen, which is job loss. And job loss takes, let's get real here, everybody. Look at if you're watching on YouTube or if you're watching on Spotify or wherever else, let's look at each other in the eyes right now. It takes a lot longer than it used to to find a job. And if you're in a career, white collar, blue collar, I don't care what it is, you want to work somewhere that has the possibility of you staying long term. And so you don't want to just take any willy-nilly job.

Starting point is 00:28:26 You want to take a job that's going to help you long term. It's going to help you and your family fuel the fire. And the fire for you is that financial independence. You want that financial independence. And guess what? Every paycheck that comes in gets you a little bit closer. It inches you a little bit closer. Every day you drive into work and come home,

Starting point is 00:28:42 you're one day closer to that financial independence. You got to stay motivated. You got to stay getting after it when you're doing this stuff. And so for me, I want to remind you day after day, week after week, month after month, it feels like you're grinding. But you can do this. You can absolutely make this happen and you can transform your life. Now, because of this, we need that six-month emergency fund in place because if you lose your job,

Starting point is 00:29:07 you want to have enough time and runway available so that you can actually choose the career opportunity that's best for you so that you can scale your income again and get to that point in time again. Then, if you have to use your emergency fund, we're just going to recycle this and start all over again. Don't worry about spending it. You are going to be in a point in time where you will be a okay. Now, if six months feels as though it is still too tight for you and you want to have more in your emergency fund, maybe you're a business owner, maybe you have variable income, you don't know what's going to happen next. More power to you. We call this the swan number. So beyond six months, what is your sleep well

Starting point is 00:29:41 at night number? Swan? Well, for some of you, it could be a year. For some of you, it could be two years. I want you to sleep well at night, though, so figure out what that number is, identify what it is, and continue to save until you hit it. That's the goal. That's what most people want to do. Morgan Housel, the author of Psychology of Money, has stated, I've seen him state this in interviews, this is irrational, but I like to save way more than 12 months of cash on hand in my emergency fund. Makes me feel better, makes me sleep well at night, and I feel as though this is a good position to be in. So what is your swan number? How do you want to think about this? And then go from there, okay? Next is let's talk about the fourth number I want you to target when it comes

Starting point is 00:30:21 to financial freedom. And the fourth number is taking your monthly income and multiplying it by 0.55. Okay? What is this number going to get you? This is the amount that you should be spending on essential expenses. Things like your rent, your food, your mortgage, your car payment, your debt payments, your medical expenses, all of these are going to fall into that category. Now, in reality, I like for you to have a range between 50 to 60%. And so this is right smack in the middle of that 0.055. And this is a guardrail.

Starting point is 00:30:56 This means that it helps you stay within these specific parameters. Now, if you're way above 60% of your income, being spent on essentials, you may have one or two problems. This is going to tell you right away what's going to happen. You either have a spending problem, which many of you, if you're making over $100,000 per year, could possibly have a spending problem. Not everybody, but some of you could. There's a lot of high earners out there that live paycheck to paycheck.

Starting point is 00:31:22 Listen, we have another podcast that is just for high earners, and many high earners out there are living paycheck to paycheck. It's called Henry's, high earner, not rich yet. and when you think about something like this, you want to make sure that if you are above that 50 to 60% range, then you've got to figure out what to do. But the second option is if like you're spending 80 or 90% of your income on essentials and you're like, I can't cut back anymore, well, then you don't have a high enough income for your current lifestyle. Let's say you have three kids and you're making $50,000 per year and you live in a high cost of living area. Well, that's why you're spending all of your money on essential expenses. and people who don't have a high enough income,

Starting point is 00:32:02 you can only cut back so much. There's not much more that you can cut back on. So then you have to make the choice, I am going to figure out a way to increase my income. I'm not going to patty cake this for you guys. You have the two options. It's either increase your income or it's decrease your expenses. And if you can't decrease them anymore,

Starting point is 00:32:20 and I know how difficult it's being. You probably feel as though you're grinding. There's people out there working two or three jobs just trying to make ends meet. but we've got to find a way. We've got to find a way to get to the point in time where you can increase your income so you don't have to be in this situation anymore. In this situation, I've been there.

Starting point is 00:32:41 I've been there where I'm living paycheck to paycheck and I'm like, I don't know what I'm going to do. I was making $30,000 per year and I didn't even have kids yet. So I can't imagine for some people out there what you have to struggle with. I know what it feels like. And so I want you to realize that you can do this, but it's going to take a little elbow grease. It's going to take a little planning

Starting point is 00:33:01 and it's going to take a little understanding of what to do next to increase that income. Increasing your income when you have a low salary is a really, that honestly should probably be a podcast topic that we cover. If you guys want me to cover that on a podcast, let me know down below. I would love to hear from you if you want me to cover that topic.

Starting point is 00:33:16 So just let me know and I will definitely do that if we get enough people reaching out. Okay. So that's the big three I want you to think about. Now, if you're overspending, attacking the big three, housing, food, transportation is going to be a big one. Also, some of you may realize, well, I'm in a season of life where I'm saving for a wedding or I'm saving up for daycare right now and I'm spending a huge portion of my income on daycare. Okay.

Starting point is 00:33:38 This is a season. This is a season of life. As long as these seasons don't just keep coming up every single year, but you're in a season of life where maybe it's temporary, then that's okay. Reduce the amount that you're saving to 15% if you can only do that. Or 17%. You know, it's not a big deal if you can't quite get to that 20% amount. and you can't quite get to this certain stage or you can't quite keep it at that 55 or 60 percent, then that's okay.

Starting point is 00:34:04 You're in a season, but you got to realize you got to reduce it down at some point in time over the course of the next four years. Okay. So I want you to have a plan to do that. I want you to have a plan to think about that. Listen, I care about each and every single one of you. I'm saying this stuff because I want you to be successful. I want you to be successful in every single thing that you do. And so when we start to think about reducing some of those expenses,

Starting point is 00:34:25 we just want to make sure that we are doing this in a way that makes sense for us. Okay. So those are the four dead simple steps to becoming financially free. If you calculate those four things, you're going to be on a great track to becoming financially free. Now, there's so many more things that you could be doing, but don't worry about that. Don't stress about that. Just start with these four.

Starting point is 00:34:45 And then start to add things to your financial plan as time goes on. Now, in Master Money Academy, we give you a six-month roadmap that transforms your finances in six months or less. So if you want to go deeper, make sure you check that out if you haven't thus far. Now, we're going to go through some of your questions that have been out there. And actually, I'm going to go through two questions from members inside Master Money Academy because I thought these questions were so good that I wanted to dive even deeper on the podcast so that you guys could hear this.

Starting point is 00:35:09 So we're going to dive into two questions right after this. All right. So these two questions came from members inside Master Money Academy. And I want to show you because I'm answering questions just like this every single day. But I wanted to kind of dive deeper into this on the podcast. I thought it was really important for everyone to hear this because this is some fantastic financial education that can help you when you're starting to think through some of these scenarios. Most of us picked a bank years ago and never really thought about it again. But when you stop and look at what you're actually getting, it makes you wonder if there's a better option.

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Starting point is 00:36:22 number one choice for banking. Head to chime.com slash pfp. That's chime.com slash pfp. Sign up now. It only takes a few minutes. Chime is a fintech, not a bank. Banking services and chime card provided by Chim's bank partners. Qualifying direct deposits require. Terms and limits apply. Go to chime. com slash disclosures for details. One thing I've learned as a business owner is your CPA should only show up once a year. The best tax strategy happens all year long, not when you're scrambling to file your tax return. And that's what I like about guilt. Gelt is the modern tax strategy firm built for business owners, hires, and entrepreneurs. They pair dedicated CPAs with modern technology to help make taxes part of your business plan instead of another

Starting point is 00:37:05 deadline. And what really stands out to me is they don't just prepare your taxes. They revisit your strategy every single quarter, helping with things like entity protection, retirement contributions, and finding credits and deductions you might otherwise miss. Plus, they handle both your business and personal tax compliance all in one place so everything can stay organized. So if you've outgrown a CPA who is reactive instead of proactive, then Gelth is definitely worth checking out. Schedule a call at join gelp.com today and learn how your taxes can become a lever for growth. That's join gelt.com and schedule your discovery call today. Personal finance podcast listeners get 10% off their first year of service. Just mentioned the

Starting point is 00:37:50 show name, personal finance podcast on your intake form. My relationship with money has changed a lot over the years. Early on, I thought building wealth was about making more money. Now, I know it's really about having clarity. When you know exactly where your money is going and whether you're on track, you make better decisions. That's one of the reasons I love Monarch. It's the personal finance app that tracks everything from your accounts and investments

Starting point is 00:38:14 to your savings goals and spending. So you can see your entire financial picture in one place. One habit that's made a huge difference for me is my five-minute drill every single morning. I open Monarch, check my spending, investments, cash flow, and net worth, and I'm done in just a few minutes. It gives me confidence that nothing is slipping through the cracks. I also love the AI Weekly Recap because it'll flag spending changes, upcoming expenses, or shifts in my net worth before they become a problem. Instead of reacting after the fact, I can make adjustments early. It really feels like having a financial advisor in your pocket.

Starting point is 00:38:51 Write your own money story with Monarch. Use code PFP at Monarch.com to get your first year of Monarch core half off at just $50. That's 50% off your first year at Monarch.com with code PFP. So the first one we're going to be talking through is Roger. And Roger is an amazing member inside Master Money Academy. And I'm going to kind of go through his question. and then I am going to dive deep into my thought process on this. Okay. So Roger says, I have a diversified portfolio and I enjoy buying stocks. Yes, that's probably not great, but I do research, etc.

Starting point is 00:39:27 I'm not looking for the next alphabet, but that would be nice. Most of my investments are in index funds and ETFs. At what point does it become an issue with the amount of individual stocks you own? And is there a maximum number I should just stop buying? I own probably around 20 individual stocks. Again, my highest percentages are in index funds and ETFs. So this is a wonderful question from Roger, and I think for many people out there, you may be asking yourself the same exact thing. How many stocks should I be owning once I get to the point where I'm able to own individual stocks? Now, as a reminder, for anybody who hasn't heard our episode talking about the portfolio pyramid, the stage when you can start to buy individual stocks is after you have your first 100K.

Starting point is 00:40:07 So we want you to have your financial foundation of index funds and ETFs for at least your first $100,000. Then you can start to add in a percentage of individual stocks at like 50K. 15% of your portfolio, somewhere in that range. But 80% is always going to be that index fund and ETF holding. And then you can start to add in some other stuff. So when we think about stocks like this, I want you to think through, okay, well, when I am going through this phase and when I'm starting to buy individual stocks, how many should I have?

Starting point is 00:40:33 How many should I have on hand? When it comes to companies, I like to diversify as much as I possibly can. So I don't have a problem with anybody owning more when it comes to stocks. Now, with index funds and ETFs, we teach, hey, we want you to have like between one to seven, somewhere in that range. That's okay to have in an index fund and ETF portfolio. But going beyond that, it's just a major overkill. I mean, you're probably just adding in all these different funds.

Starting point is 00:40:59 It's really hard to keep track of them all, these expense ratios. How diversified are you? How much overlap is there with those index funds and ETFs? But when it comes to individual stocks, you can almost build up your own little index fund ETF fund that are of companies that you like. So for Roger, this could be the Roger fund. For me, this could be the Andrew Fund, where I want to build up a little portfolio that I like of stocks and I like to have more. As long as you can keep up with them, that's what I like to do. So my goal always is if I'm going to build an individual stock portfolio, I want to get into

Starting point is 00:41:30 that 15 to 20 stock range where I can build up a diversified portfolio where one stock isn't going to kill me. Now, sure, you could have a separate account. That's a home run account. And I think that's actually kind of fun to have is having a separate account where you just save some extra cash that you would have just blown on something else, put it into whatever type of accounts you want and invest in some of those stocks that could be home runs. That'd be a fun thing to do. You know, if you want to buy a SpaceX IPO or you want to buy an anthropic IPO, something like that, that's a really fun thing to do. But when we're investing in our individual stocks, we can build up a little portfolio. For example, a couple of companies that I'll talk about that I own.

Starting point is 00:42:08 So I own, this is not advice whatsoever. Please do your own research. But let's say, for example, I wanted to build a portfolio of some tech stocks and wanted to get some banking stocks in there. Maybe I wanted diversifying some healthcare. Maybe I wanted diversify in some, you know, commodities or something else as well. You could add all these different things in that you want to. And you started to buy maybe some Amazon. Maybe you started to buy some Robin Hood stock.

Starting point is 00:42:31 Maybe you started to buy some SoFi stock. Maybe you started to buy, you know, adding in some Google or some alphabet. bed. Maybe you added in some United Healthcare. It doesn't matter what it is. But if you started to diversify this portfolio and you started to diversify it across different industries, all of the sudden, you've got this portfolio that can be diversified enough, whereas if an industry starts to struggle, it doesn't pull your weight of your entire portfolio down. And I've seen people do this time and time again where they're really successful. We've had Brian Feraldi on this podcast for, what, four separate times now and talking about individual stocks. I love individual stocks. I think

Starting point is 00:43:06 they're so fun to invest in. But you've got to do the research and you got to do the legwork when you're doing this. So as you start to increase each stock, you just got to have an understanding of earnings calls, you got to understand what's going on with that company so that you know if there is a point in time where I have to sell, I'm going to be able to do this the right way. Also, when it comes to individual stocks, I want you to each one that you invest in, have a reason why you're investing them, having an investment thesis for each stock, so that you can ensure that you have a plan in place that you know when you're going to sell and when you're not going to sell. Because if there are reasons for you to sell, you don't want to just do it based on a motion,

Starting point is 00:43:42 you don't want to do it based on, you know, oh, shoot, Nvidia had a bad quarter. I'm going to sell it right now. When long term, it could be a hundred bagger. You want to make sure that you're on pace and you're on target for what your thesis is. So having a little, you know, Google Drive file or having a notes app or, you know, something like that, where you are journaling why you're buying some of these companies, how long you intend. tend to hold them and when you're going to re-evaluate if you're going to continue to hold them. Also, you want to evaluate, are you know, listen to quarterly earnings calls or you're just going

Starting point is 00:44:10 to evaluate them on a yearly basis? What's your strategy here and how you're going to think about that? Now, I love this for many different companies. And so for me, I have been building up an individual stock portfolio again. Again, I know that for the most part, I likely will not outperform the S&P 500, but I enjoy doing it. I enjoy investing in individual stocks. I like researching companies. I like understanding what's going on. So for me, it's fun. It's a fun thing for me to do. And so I do this in a way where I'm trying to get to the point in time where I'm 20 plus stocks, so I'm building on my own little mini fund. That's my goal. And so it's going to be 15% or less of my portfolio. It's going to be a smaller structure of my portfolio. But it is going to be

Starting point is 00:44:48 something that I really, really enjoy doing and I can do it for the long run. I can do it in a way that makes a ton of sense. And if I've got a couple of home runs in there, that's even more fun for me. So great question on here, Roger. And I think having 15 to 20 stocks in your portfolio is a great thing. It helps you diversify. But if it's all 15 to 20, you know, in one sector, just consider doing your research on diversifying, you know, even further than that. But again, you can do whatever you feel as though is the right for your investment criteria and your risk tolerance. I just want to make sure that I note that because it's going to come down to really what you want to do. So that's a wonderful, wonderful question. And if anybody's, you know, got a question on that, please leave them down below in the

Starting point is 00:45:24 comments and I can answer any questions that you have. All right, the next question is from Brandon. and Brandon had a wonderful question about Trump accounts because we had an episode recently talking about Trump accounts and when to use them, when to not use them, those types of things. There's a bunch of loopholes you could do, all that kind of stuff. And again, just remember, anytime we talk about Trump accounts, this is not political, we're talking about getting free money, we're talking about, you know, taking advantage of some of this stuff for your kids. Please, just understand this is not political.

Starting point is 00:45:51 Okay. So, Brandon had a great question talking through a few weeks ago. The Trump accounts were discussed, and I honestly didn't think of using them with my older kids who wouldn't qualify for the government funds and the Dell matches. And I end up opening one for each kid, but now I'm wondering if I should move what I already have set aside in VOO through a taxable brokerage account for each of them to the Trump account. Changing the contribution is a no-brainer, but not sure if selling, after hitting long-term capital gains and moving it over a Trump account makes sense. Based on my income, I'd be paying about 15% tax rate. Not sure if account size plays into it, but one is about $3,000 and about a three-year-old. and the other is about $15,000, with 60% of it being contributions.

Starting point is 00:46:31 So this is one of the honest takes that I would have is if you are going to go all in a Trump account, there's a couple of considerations to think through. I actually consider this myself. I have accounts with all of my kids, and each of my kids is in a taxable brokerage account. Each one has their own individual taxable brokerage account, but it's in my name. Okay. And then they are the beneficiaries of these taxable brokerage accounts. The reason why I did this was because I won additional.

Starting point is 00:46:57 flexibility. And Brandon knows this, but I want additional flexibility and I want to make sure that I am doing the right things in terms of giving them the money at a time that I want to give it to them. If I have a knucklehead for a son or a daughter and they get to the age of 18 and they realize they want to blow the entire thing on a brand new Rolex or a brand new Birkenbag or a brand new car, well, all of that hard work that I just put in for compounding is going to go away pretty quickly. And so I want to be cautious about this and I want to be cautious about the way that I think about doing this. And so I know that's not a concern. I'm trying to equip my kids to be very financially savvy. And so hopefully that's not a concern, but it's always in the back of your mind.

Starting point is 00:47:39 And many of us, no matter what our upbringing is, we can rebel the other way. And so we want to make sure that we are cautious about this. I've seen it happen many times. And so I just want to think through that before I dive deeper into this. And so for me specifically, when I fund the Trump accounts. I'm going to use, you know, a couple of different things like making sure that I can contribute through the business to fund the Trump accounts because you get to do $2,500 per year through a business through your employer. And so I will do stuff like that. But I probably am not going to put my main contributions into the Trump accounts currently because your kids get the Trump account at the age of 18. Now, for some of you, that may be a okay. That could be completely fine is if you

Starting point is 00:48:17 want to put their money in the Trump accounts because you feel as though, you know, there's some tax benefits to it and you think it's be great for them. And, you think it's be great for them. it's of interest to you. So I think that's completely fine if you want to go that route because there's a lot of benefits to it. The other thing is to think about the Roth conversion, that you can do the Roth conversion, you know, maybe in their early 20s. If you haven't heard our episode talking about that, we talk about basically one of the

Starting point is 00:48:37 biggest benefits is in your early 20s, when you start your real job, you can do a Roth conversion, meaning you can move the money from a Trump account into a Roth IRA. Well, then all of a sudden you get a bigger lump sum in a Roth IRA that allows you to grow that thing long term, especially if your kids don't have access to a custodial Roth IRA yet because they don't have earned income could be a good strategy. And that's something worth digging deeper if you haven't done so already. I think that can be very, very powerful. So there's a couple of different reasons why you would do this. And there's a couple of different reasons why you would not. There's also things like qualified education expenses that are penalty-free.

Starting point is 00:49:11 There's things that you want to look into like that that Trump accounts can be utilized for. First-time home purchases up to $10,000. That's another reason if you're saving for your kids home. and I think there's other cool things that you can do with it. But for me specifically, I'm doing still, I'm not going to move the amount that I have in the tax below. I will just contribute separately to the Trump accounts if I want to use them that way. And then beyond that, we'll kind of figure it out as day by day and week by week goes. There's also legislation still being passed on this.

Starting point is 00:49:39 There's been some recent bills that have come up on this for the Trump accounts and some other things that they're going to do to try to increase the benefit. And so as those start to progress, I will keep you guys updated so that we can look deeper into them. Again, it's one of those things that if you get the free money, yes, definitely always do that. Free money is great. And if you have the opportunity to, you know, take advantage of, you know, the Dell free money and or the government free money, that's the way to go for sure. So listen, awesome question again, Brandon, and I appreciate you. We just answered that in Master Money Academy too, but I wanted to kind of expand on it here as well

Starting point is 00:50:13 because I think a lot of people could get some benefit out of it. Well, listen, thank you so much for listening to this episode of the Personal Finance Podcast. Again, to go through the four dead simple steps to becoming financially free. Take your monthly income, multiply it by 300. That's your freedom number. Take your monthly income, multiply it by 0.2. That's your minimum monthly investment. Take your monthly expenses, multiply it by 6.

Starting point is 00:50:35 That's the minimum amount that you should have in your emergency fund ultimately. And take your monthly income and multiply it by 0.55, and that is the amount that you need to budget for, for essential expenses. So which one of these have you not calculated before? me donate in the comments below. And thank you so much for listening to this podcast episode. Again, if you want to dive deeper with me and if you want to transform your finances over the course of the next six months, consider joining Master Money Academy. I want to invite you to join Master Money Academy and spending some time with me. Every single day now, I am in Master Money

Starting point is 00:51:04 Academy answering questions, answering messages. But in addition, we do weekly live coaching calls. We do monthly master classes. And we're even doing challenges. We just finished the Automate your Money in a Weekend Challenge. There are so many different cool things that we are doing inside Master Money Academy. I am so excited for this group. We have people from all stages, paying off debt, all we up to really high income earners who are investing over $100,000 per year inside Master Money Academy. And I know that I can transform your finances. I'm really good at this. I can transform your finances over the course in the next six months. So if you're interested, it's a seven-day free trial. No skin off my back if you don't like it. But join, check it out inside,

Starting point is 00:51:41 see if it's for you. We just moved it over to school. There's some really cool stuff inside of school that I'm excited about that we can do. So really, really excited for that. You get all the courses, all the courses, join for seven days, check out the courses, join one of the lives with me, have a chat with me. Would love, love, love to see you inside Master Money Academy and get to know you because I get to know a lot of our members and it is really, really fun. Again, thank you so much for being here.

Starting point is 00:52:04 I truly appreciate each and every single one of you, and we will see you on the next episode. Two and five Canadians will hear the words you have cancer. That's why every step and dollar rate. matters. On September 19th, join thousands in Toronto for the Princess Margaret Cancer Foundation Walk. Challenge yourself, friends, and family to walk 21 kilometers in support of life-saving research. Together, we can carry the fire and help create a world free from the fear of cancer. Register today at pmcfwalk.ca.ca.ca.

The Personal Finance Podcast - 4 Dead Simple Steps to Become Financially Free

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