Does Budgeting Actually Work?
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OK, are you ready to .

answer chance question? question.

Tell me this, the shown spell IT, because I don't see that is S A N or N.

C spell at .

the first way. S A W is a lot of on S E A N.

Okay, well, sean says hi. In regards to the twenty three, eight rule, how did you end up at the eight percent number? I can understand that the twenty percent in the three years help mitigate depreciation on the car and time out of the market. But i'm curious how you landed on the eight percent. Would you like to explain yourselves?

Let me think through, right? So i'm trying to go back because there are a lot of rules of thumb out there. And you can go like google, like car buying rules of them, and you get a bunch of different and from a want to different people for all the rules that we design and all of the things that we come up, we try to help you.

What we try to do is take a rule form or a commonality or something. It's like general guidance, but we would apply like real world next to IT. We want to apply OK. How does this actively play out? What does this like in my life and my situation, the situation of the clients with whom we were .

say something yeah is that without a doubt is because IT is more than encompassing as we know those other deaths than always was thinking about you. We have these other rules. But there was also there was just a range of, I didn't the double digit, and I guess we could have put nine percent if we wants to give a little more. But I just did not want Carlos to be a double digit part of your life because they just horrible, all ready for your financial life. So why in the world would you want a double obligation that's appreciating the moment you drive IT off?

Yes, that exactly where we were going in terms of reverse engineering, we're thinking about what are most people faced when they riber twenty three, eight is the stage of your life, stage of your financial journey where you're probably not at the to pay cash for an automobile ile yet. You need to finance in order to have some sort of reliable transportation.

Well, most often in those stations in seasons of life, there are other things pulling on you. In addition to maybe having a car payment, you might also have graduated with some sort of still alone debt, probably have a mortgage. You might have people like children, spouses, whatever, pulling on the resources that you're created. And so we didn't want the car to be something that took your wealth building journey off track. And so we just can set on and set.

There's a 50 percent once I look like IT seems to aggressive if you have these other things going on and we want you to be aspiring to save twenty five percent and we think about， okay, how much is housing, how much is giving, how much is giving, how much is taxes? How much are these different things? IT wasn't exactly a plug e number because, again, we wanted to be realised and we could say twenty three, two, and you could have like an incredibly affordable automated.

We wanted to be realistic, but we also wanted to be practical and process so that you can actually get a card that you can actually afford and still be able to meet and satisfy all of your other financial goals. So i'd like to say there some magical, like incredibly well thought out mathematics to the eight IT was much more reverse engineering to see what practically makes sense, what was our experience. We were coming through the early years of our .

wealth building journey. Look, the typical car bar these days, when you look at the annual stats, we getting close to eighty months on the financing. We're getting to over seven hundred dollars a month car payments.

The majority of people are doing cars with negative faculty. They made such a bad deal on the last car that they drove that they're having to roll the alone baLance into the new car. Um and so amErica need somebody to be hard with them on these car purchases because they they're literally driving their wealth around instead of building that wealth to build finances. So yeah, we took a hard line. I don't want to be double digits.

I also wanted to make sure because IT look, but there is also at the tipping point the other way where I know these conquers out there, that yeah, maybe to be best if you bought a thousand dollar car, but is a thousand dollar car going, or five thousand dollars AR even be something that you can get this go safely, get you or even put your family into. And that's where when we played around because we are in nerdy and I went to say, yes, there is a math and this that um this is where we land because I felt like if you ordinated this with all the other debt rules, you'll see that this this is going to baLance itself out. Also remember we had that person a few weeks ago try to break, he added up all these different rules we have.

And I said that what this person is not taking an account is that your life in your choice is going to look different in your life. You're forties and you're definitely the thirties in your messy middle. And that's what I love, is car loan debt is typically something that you're going to experience probably in your choice, maybe even third ties as you're getting started.

But financial meetings don't even have car debt, because as you get into your forties and beyond and life starts feeling little easier, you could be paying cash because cash is preferred. But this is going to be the rule. It's going to be that bridge and let you get to that first wealth building tool.

which is your J O B. Remember, eight percent of the upper threshold, twenty three, eight, does not mean that you can only put down twenty percent that you must paid off over three years, or that he has to get eight percent. Those are the end of the threshold.

You can put more down, you can find IT IT for short of part of time, or IT can only represent three to four percent of your income. Those are the like upper threshold, the upper limits. Anything less than matter, Better than those is absolutely fantastic with the best be and obviously paying cash for a car.

Good answer. Well, shon, thank you for the question. Thank you for thinking that through. Hopefully that helps if you would like a money guy tumbler, we d love to send you once since we answered your question today on the show, just email winner at money guy outcome work on getting that sent out to you.

What do you want .

to say? Chicken .

dinner.

Somebody actually nail that. You, but they are .

either chicken .

or chicken .

dinner and chicken, anything else to screw things up. Incredibly but american. I have been watching racket.

Rf o yeah.

racket of breaks the internet. Second one. And so I think about that, that chicken at money god com is just sitting out there somewhere in a poor dumb ter out there in racket rough country. You, because he doesn't actually lie and where it's supposed to. So don't do don't write a bunch of the males to .

chicken IT actually .

red rose not going go to do with IT.

Oh, all right, we've got some more in the hopper here. We have one from David up next, he says my company has put a cap on my ability to invest in four one k at eleven percent due to high earners status, good for income, bad for savings. He says, any advice on how to plan and save around this cap?

呃， so limited, can I explain what happened here? So every every year, four one k plans are required to do a certain amount of testing because what they want to make sure of is that the participants inside of those plans, the highly compensate of participle, either the owners of the company are the folks that make over a certain income thresholds, is around one hundred and fifty thousand wars this year.

Those types of folks are not benefited disproportionate to what they call the non highly compensated employee class, anyone that under one hundred and fifty thousand or so dollars inside the plane. And so every year you have to do testing to say, okay, this group of people did not receive a benefit that was substantially greater that this group of people in less, in less, in a major I don't know if it's a majority, that's probably that may not be accurate. But I think a good number of plans now actually Operators, what I notice save harbor plans in the way that save harbor plans work.

Is this a hey employer, if you put a minimum contribution in on behalf of your employees and IT can be either like a three percent for zero, or if your employees put in five, you match for if you'll do at least that much, then we're gonna. You automatically pass the testing so that you are highly compensated. Or your owner class, they can go max out there for one k, they can do the full twenty three thousand or thirty thousand five hundred, even if none of your other employees participate, that's still gonna satisfy the testing.

What what's happened for David's companies? Their plan that sounds like does not have a safe harbor and k plan. So every year, they have to make sure that based on the actual contribution percentages, the actual the feral percentages, that group of employees, the tire income does not have more going into the plan than the lower income group of employees.

So the very first question, David, I don't know. It's a big company, small company. Very first question.

I would ask if I had a contact in H. R. Maybe I know something to. I noticed that we keep getting refund these dollars.

Have we ever considered a minding the plan to make IT a safe harbor plan? Have you run the numbers? Might that be more cost effective for the company and a Better benefit? And you might be surprised that you might just have been set up this way twenty years ago.

Nobody ever revisit IT. Nobody knew that this was an adjustment that can be made. That what be the first thing I would do to see is there away that we safe harbor said, then my contributions are no longer .

cat A S the thing, and see if this could be an updated plan. Get you out of this hassle and also let you save freely and not be stressed out that going to refund restate W A two is a big pain in the arian. And that's why the second thing, assuming that they came because maybe it's just the way else compensation is structure is just way too expensive form to do that.

But um I would at least ask if your employer to give you some guidance on what the safe contribution percentage is or a mount is for at the beginning of the year so you can kind of know what you can save and know that you for the coming year where you likely will be safe on the contribution and then that will potentially allow you to to to to ask your employer, is there going to be an opportunity the of the year to chew up, you know, to have a Better let them do some analysis or testing at iran so you can do if you have some urine bonuses. If you can put a little bit extra and without having to restate the w two in your contributions and all the things, but that that way I would handle IT is a be proactive on this instead of every year having this bomb blow up on you. You need to take an active role in this, both with trying to get the play and updated or if you can even get IT updated, at least making an active role of trying to figure out what's the safe level of contributions you can make in. Maybe you need freeze the balloon little differently and save elsewhere. That's going to stay after a tax account.

what you can do. Well, four one case can the seven percent? I guess I just going to stop saving.

Well, you won't have the tax and syn vise savings like pretax contributions to four one k. What you may be able is OK. Well, great. I'm going to do the eleven percent there. But then I want to make maxi backdoor ros from high, make you says and there's nothing wrong.

We're taking that additional percentage that you were going to put your four one in k and just start dropping that into a standard regular after broken account? And did you going to go and be building that ste p 7， that hyper cumulation, that third taxable buckets? So just because you kid do in the four one k doesn't mean that you don't still need to be saving. Your goal should still be to save twenty five of your growth income for the year.

Your future self is still counting on you to have the obligation of saving for the future. You just don't get as much tax favorite of opportunity, but you still need to be doing IT good stuff.

David, thank you for being here and asking the question. We hope that helps you out as you think through this and as a thank you for asking the question, we'd love to send you a money guide tumbler. So just email winner at money guy out com to cash on that since we chose your question on the .

left stream today. Winter, winter, that even cry. Didn't even, didn't I just practically to hear ring? And in my years, good.

Jake has a good for you guys.

So J, I think so.

just as jack, so i'm the .

boat you gave us and we an .

opto ld, him, he had to come here. When did the book?

If this is Z.

J is the jack.

if this is another jake, we're so happy here. I mean.

we like all is definitely the chat today, but I know that sometimes we have most people, people in jake, so I didn't want all right. He says a friend in step three. A friend is in step three, but knows he will need new tires in the next few months. How should someone handle expected big expenses while tackling debt? This is a hard one, right?

I'm i'm i'm thinking about the practical implication here. Therefore, the financial of Operations, hi edg, discovered we've done that. Number two, employer match.

We have done that now we get number three hundred years that we get some credit or that were trying to knock out get gone. But we know we have something coming up. We know that we have new tires coming up.

Well, that's the problem with having high interest debt because, let's say, the new tires happen tomorrow and you ve no savings available, nothing there to be able to go buy those new tires. You know what the friends you have to do to get the new tires you have to put in on the credit ard like that's what's going to end up happening in the situation. That's why having credit or data so detriment.

What's a whole that while you're in IT IT is so easy for to get deeper and deeper and deeper and deeper and deeper. So what the council that I would give this friend is, is there anything in our life? Is there any way that we can get our lifetime le footprint as small as possible immediately?

Can I cut out descriptions? Can I cut out the gym membership? Can I decrease the grocery bill? Can I forgo the whatever the thing is? Can I push off this thing to get IT absolutely as clean as possible, so that I can continue to attack that, attack that that attack that, because I wanted get out of that debt, so that I can get the step for, so that I can begin to start building that a mercy fund there will, in the future, be the way that i'm going to satisfy paying for those tires are paying for those unknown, unknown. Agree, disagree.

Want to find? No, I mean, you nail IT, but this is what I think is what creates financial mutes. Is that when I hear situations and look, as soon as I heard these questions, you late IT out. Step one into the highest covered employer match.

Those are taking care of now with the car part of, I mean, the tire purchase is really a step three or four, you using the credit card to pay off, or you're trying to save up in your emergency serve step, think you're immediately spending IT on the the tires whenever he gets to the point of point of no return, you have to do IT. Those are the one in the same. And a lot of ways is because it's it's coming back to the same pot because the the credit card deaths still sitting out there and running in the background.

So I don't like IT when IT feels like you're going to help us situation. I always try to ask myself as a finding commute is there's something else I can do. They can make this situation Better.

Is an incremental decision, a small decision I can making. You can late IT out. I like talking about the subscriptions and other things that's, but I want to go even deeper into this.

You realize my tires. If you go look at the, like, the sams clubs, the costa s over the specific months, that they will put certain tires on, special. And I went to tell you, do the work that others won't do. This is, this is the what makes financial mutton special is because this is a moment in time that you having to choose between step three or four on this tire.

But that doesn't mean that you can't maximize how do I get this tire as cheap as possible? And here's and so as well, always, if I know, I want to put mission entries on my wife's car, I know that every other month, it's either this month it's going to be this brand, but next month it's going to be you know, mission. And then also every so every so often, tires get rebates on and i'm going to go do my research to figure out what's the best tire I can get at the lowest cost.

So i'm not just the person who mondale's goes into the car store and let them tell me what car tires to put on there. I'm actually be a proactive consumer to know on the front. And this is why when I back cars, I get the best deals out there because I don't i'm not A A, A passive member of this transaction.

I'm going to do my research if i'm ready freezed on which step of the financial order Operations that I may least going, make sure i'm getting the best deal possible, minimize the impact of this. So I come out as a financial mute and then I use this is also the rocket fuel that i'll never ever get myself in this type of situation and know just how predatory that's high interest that on credit cards is. So you can use this to be the part that you bottle up internally and never get yourself here or ever give.

Do you feel like we live in a world where people are just too comfortable to dead? Think, if you are on fire, if you literally caught on fire, how quickly would you try to be not on fire immediately? What what would you do to try to not be on anything in your power? And yet people don't recognize that when you have the high interest, when you have the credit, or that is a literally your financial life being on fire.

And so you got to a cut, relate lessons and make hard decisions and make difficult choices to try to stop that, to get that gone. I just think so many people don't approach IT that way. They get two club is just so I can afford the two hundred and months it's in the background is not real, IT is very real and IT will very much prevent you from building the financial future that you want.

One other peace advice about tires, pay attention, because tires is safety also, but don't let them I know for a season especially desperate I mean, people try to convince you, do retreads that's disaster, focus on the safety also. Don't be careful, is doing one tired of time because you're in a desperate situation that you got ta be smart and also don't just rotate your tires and do things.

Be a proactive member full circle on how you get yourself out of the situation. Don't just let life happen where your book tires are building, your front tires are full thread tread or you have three tires at a brand new and they have won this ball. You you want to do this right and then make sure you're learning through experience so that you just you're Better on the other side of IT. It's great.

Well, jake, great question. He said in the chat, he was so excited. Send this clip to her, so that's great. If you don't already have a time, I feel like he must.

right?

If you don't buy, feel free to email with that money guy. Don't com.

Because we love to make sure you probably bow as a musters ash. I can see .

them doing a body cut movie where they go around solving financial crimes.

starsky and hudge.

So i've got so we have something exciting and it's over here that you can see and we can tell about what a forca Christal. I can tell you this. It's not a bud cut movie. And let's we want to go back to the draw war and just really think this all we think, maybe .

what they could .

be .

a cut that, of course, sees the one that still in out .

the evidence for him there. I say it's more exciting .

than a bodiced .

movie, A D, A.

I wrote that there was a real question is.

Body cut movie question mark Christal.

Well, we do another question.

The next question .

is from Caroline IT says is their disadvantage to heavily only investing in rough form k in rough ira with a one hundred twenty k income? My employer match goes into a traditional foo in case, so i'll have some non rough money along with my broken age account. Um can you invest to heavily in rough?

What do you think how man this is? I mean, look, without a doubt, there might be some tax savings at you in the current that you're walking away from because as the catch with raw accounts is that you don't get a current tax reduction for the promise that you get tax free growth. And we only I love compound growth you love. So the Caroline give her her age.

He did her to Caroline caron.

And I play horse's with most things with english language so you can expect me to get everything right. But um I would I would I would tell you my favorite child out of the three buckets, you know between aftertaste, tween tax, the third and roth. I mean, I hate to say that because i'm a bad parent for giving this answer is rough.

I mean, that's why it's usually the first to go in and it's the last to go out with. You get old and know the government's forcing to take all these requirements on distributions and everything else. So I actually other than the tax current tax savings, um I love me some rough account so so you just be you and keep rocking and roll.

Can I have too much rough? No next question. No um here's the way I think about .

I think thing member, we had a client and they had a once in a lifetime during the great recession that their employer had this unique thing um that allowed them m IT was the first account I think i'd seen that was seven figures rough and I was edin having seven figures in a roth account. So i'm sorry, I had a flashback.

The guided a big year. It's going be good to pass IT on here. I do they get this. Yes, we love off so much. But brian said this.

I just want to put some some numbers to what he said because you said, is that a bad thing for me to do all rough at one hundred twenty thousand dollar or income? Uh, just very quickly. Google, uh, tax break.

It's 4。 So depends is where does one hundred twenty thousand and put you do you file single or you marine filing jointly? So let's assume that, Caroline, you're single.

And if you have a one hundred twenty thousand dol income and without knowing your deductions in that kind of stuff, there's a chance that you're in the twenty two percent tax acts, right? So if you're in the twenty two percent tax, get there, then you live in a stay where that has a high state income tax. You could very much be approaching a thirty percent tax rate when you look at the marginal effective rates.

If that's the case, then the savings that you would receive from doing pretax contributions is pretty attractive, meaning that every dollar you put in can save you thirty. Since in taxes this year, I think you have to consider that. But let's say that you're married or maybe you live in a state with no income tax, and so twenty two percent is the highest.

Well, then I think IT is very justifiable to consider doing raw because you're below the twenty five percent threshold and there's a really good chance that, that tax rate is going to be one of the lowest right now that you'll ever see. So you don't need the tax advantage right now. And you likely as you build your portfolio and as you build your financial openness, will be so thankful those dollars are tax free in the future.

But I don't think you can skip the work of they are. okay. Where am I marginally to make that decision? Should I be doing pretext or should I be doing rough?

So you think I went a little too hard and I was congratulate .

on the I was great. And I think odds are that seems like that's probably going to be the best advice. But you don't you just want to make sure you just want to, uh, uh, trust was a trust and verify as you just wanted. Do the work. No skip like they think of analyses.

measure twice, cut once.

Didn't even get a stash joke to me.

We're great career in. We appreciate you being here and asking the question since we picked your question for today's live dream, we would love to send you a money guy tumbler if you would like one and don't have one yet, just email winner at money guy dot com. Three important things for you.

One, thank you for five other case of describers. Wanted to reiterate that one more time. Huge, huge milestone. Couldn't done IT without you where you can believe your here.

And we're so grateful they say the first five .

hundred the test to get is that that but I was a journey to get here um too don't forget to go to money guy, that calm slash survey to take the financial muting survey and be a part episode that's coming out closes tonight. So just wanted to get one more pluggin there in case you wanted to be apart. And then three, I forgot.

My third you i'll take from .

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al lot to all. Hey, all these things are related in the fact that these are small decisions you can make for yourself, for us. So keep making this small in criminal decisions to create your great, big, beautiful tomorrow on your host prime press. That mister bow hanson money by team out the .

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