A Guide for Your Goals: Flowchart 2.0

[00:00:00] Welcome to the More Sense Than Dollars podcast where your hosts Nick and Harry.

[00:00:15] Welcome back everybody we got another season of More Sense Than Dollars.

[00:00:20] Season 7 ready for this one Nick?

[00:00:22] It just keeps going.

[00:00:24] It keeps on going we got a whole lot of good episodes queued up this season and we're starting

[00:00:30] with as you probably saw in the episode title a revisit of the flow chart, the income flow

[00:00:38] chart going all the way back to episode 4 when we first went through this.

[00:00:44] A lot has changed.

[00:00:45] Long term listeners should remember things have changed since then.

[00:00:49] The Ho-Gees will remember.

[00:00:51] Things have changed both with us and with the flow chart itself.

[00:00:56] So we're going to go back to it a little bit of flow chart 2.0.

[00:01:02] And we're going to have a little more of a focus on the what to do with your goals money.

[00:01:09] We just covered the retirement spending you should be saving 15% but what if that 20%

[00:01:15] of your budget is more money than it takes to get to that 15% retirement savings goal.

[00:01:23] What do you do with the rest?

[00:01:26] Yeah it's based on getting the most for your money so that you're not putting things

[00:01:32] in I guess just it's an efficiency.

[00:01:36] Yeah it's just optimization.

[00:01:40] So first should we talk about our piece?

[00:01:44] It's not that controversial.

[00:01:48] We are planning a trip to Vegas and we have both been upset at airline prices and the dynamic

[00:01:56] pricing of it all.

[00:01:57] The fact that any given day the same flights to the same place are different based on

[00:02:04] whatever internal algorithm each of these airlines has they get to just decide what

[00:02:11] the price is and you come back another day and it's $100 more.

[00:02:16] Yeah and layer that on top of how the whole landscape has changed and now you know spirit,

[00:02:22] Ryanair, frontier, Sun Country is that the other one?

[00:02:27] Not that those are the only budget lines but I expected from them to charge for the carry-on.

[00:02:33] Oh yeah.

[00:02:34] Right those nickel and dime you charge to pick your seat all those things but all

[00:02:39] of them have started doing it.

[00:02:42] Yeah.

[00:02:43] And extra 80 bucks or extra 100 bucks for a carry-on bag.

[00:02:48] It used to be you had a free check bag and you had to pay for a check bag now they're

[00:02:55] trying to get you to pay for a carry-on bag.

[00:02:58] Wild and the price that they show you is always that lowest basic economy.

[00:03:03] You're the last person on the plane, you're going to have to sit in the aisle,

[00:03:06] you don't even get to pick your seat or bring a bag.

[00:03:08] Right.

[00:03:09] If you're traveling with a group even if you book them together,

[00:03:13] they at least I know like spirit and frontier, they randomize the seating.

[00:03:18] Yeah they don't care.

[00:03:18] Even if you're purchasing the tickets together.

[00:03:20] So they could just randomize it with those two people sat together.

[00:03:23] Yeah they don't care.

[00:03:25] Yeah or it's an extra reason to convince you to pay more.

[00:03:29] Right.

[00:03:29] Right but yeah it's been bothering us so we instead of just whining to each other

[00:03:37] we figured we'd complain publicly.

[00:03:39] We have a bigger audience than we're into.

[00:03:42] Okay so to the flowchart.

[00:03:46] So we're going to do this through audio obviously you if you can pull up the flowchart

[00:03:54] to follow along we have the visual linked in the show notes that may be a little bit easier

[00:03:58] but we'll talk you through it first.

[00:04:01] I think part of it is knowing why too we'll go back on why it's set up this way.

[00:04:06] And then we'll get into a little bit more of that goals money that Nick was talking about.

[00:04:11] You know you've already set up your budget so that 20% is going towards goals.

[00:04:17] And there should be a way of allocating that money as efficiently as possible.

[00:04:25] So yeah and we've stuck to we have generally stuck to 50-30-20 as of the framework

[00:04:32] for when we talk about any of these other related items.

[00:04:35] But like we did in the budget 2.0 episode you know if you are going with 80-10-10 or 80-20

[00:04:44] or 60-10-10-10 whatever your budgeting strategy is yeah good point this should apply.

[00:04:50] You just might need to use a different portion of the income or you know modify it or adjust

[00:04:57] it to fit the amount that you are putting towards goals.

[00:05:00] Good point.

[00:05:01] So I guess first like so this one is it's a little bit more detailed.

[00:05:07] It's got easy to follow steps you know are you doing this yes or no.

[00:05:11] But yeah we can probably move pretty quickly through this first portion and then spend

[00:05:17] a little more meat of the discussion on you know what to do after you've hit that 15%

[00:05:23] yeah retirement so let's start from the beginning.

[00:05:27] Yeah so this flow chart comes from the personal finance community on Reddit and it's organized by

[00:05:34] the most urgent needs first like eating and paying your rent and then moves out to less urgent.

[00:05:41] Not necessarily less important just a little bit less pressing like you need to eat and pay your

[00:05:47] bills today the retirement savings come after that's you know established.

[00:05:52] So it starts with Nick's favorite thing creating a budget they've added that in because that should

[00:05:58] be like your given your step zero of planning out your income.

[00:06:06] Right if you don't have a budget it's pretty much impossible to answer the questions you

[00:06:14] need to get through the flow chart you know you don't know how much money you have available

[00:06:19] to put towards things how can you figure out where to put it.

[00:06:23] So there's an interesting split between so we always said you know build out your emergency

[00:06:30] fund first like three to six months what about this split of having a smaller emergency fund

[00:06:36] and then going to retirement savings and back to emergency fund as the next step.

[00:06:41] Yeah I think it's really a matter of or it's two things it's do you have the opportunity

[00:06:48] to take advantage of an employer match and what is your risk tolerance level.

[00:06:56] So the reason I'm saying that is because the split is to get one month or $1,000 in your

[00:07:02] emergency fund first whichever is greater and then after you hit your employer match on the

[00:07:10] 401k you could go back to increasing the you know your emergency fund getting up to

[00:07:16] that three to six months. It's hard and the reason that it's structured this way is because

[00:07:22] like we've said before that employer match is a 100% return on your money which is pretty you

[00:07:28] know 100 guaranteed return is essentially impossible to get anywhere else and that's really difficult

[00:07:35] to pass up. Yeah so if you have the opportunity to guarantee a 100% match if you're looking at

[00:07:42] from a purely numbers perspective it probably is worth putting your money towards that even if you

[00:07:49] don't have the biggest emergency fund. Yeah because even if you did have to put some things on credit

[00:07:56] cards if the 1,000 wasn't enough to cover it credit cards somewhere between 15 and 20% interest

[00:08:03] the employer match is 100% 100 is still more than that right. Right and there's a bit of

[00:08:08] a balance game there right you don't want to put yourself you don't want to end up putting yourself

[00:08:12] into such a hole that you never get to the retirement and you can't use those retirement

[00:08:18] savings effectively but if you have one month that could let you weather some stormier occurrences

[00:08:28] in the meantime before you get back to building out that full three to six month emergency fund.

[00:08:34] All right so you've created a budget you've paid your living expenses your needs basically right

[00:08:42] I guess that return is if we're going from highest return to lowest that's kind of priceless right

[00:08:47] your life is having a place to live and eat that's important. So I built out my small emergency fund

[00:08:54] and then I've maxed my company 401k match. Yeah say they match they match the first 50%

[00:09:03] up to six that's kind of the standard so say you got that 6% of your paycheck going to the 401k

[00:09:09] next thing you ask yourself is do you have any high interest debt

[00:09:15] and that's per this diagram anything higher than 10%

[00:09:21] yeah so that's probably credit cards or hopefully you don't have any high interest

[00:09:26] personal loans or a car loan that that's that high but it could be car unfortunately

[00:09:37] there's other ways it's probably going to be credit cards right if you're up above that 10%

[00:09:41] mark but anything that's above 10% is high interest debt and so at this point any money you have

[00:09:48] left over after contributing enough for that employer match should be going to pay off your

[00:09:53] high interest debt and like we've talked before in the budgeting episodes the minimum payments on

[00:10:00] that high interest debt should be coming out of that 50% portion of your budget. Yeah this is to

[00:10:07] actually chip away it right these extra you definitely don't want to get behind on your

[00:10:12] payment so that minimum payment is in your needs and we're talking about what do you do

[00:10:16] with the goals money that you have if you have the option to throw some extra money above

[00:10:23] the minimum payment towards the high interest debt definitely want to do that next you're getting a

[00:10:28] return don't forget you're getting a return equal to the interest that you're paying on that credit

[00:10:35] card so a 20% credit card you have to think of it as when I pay this off I'm not spending the

[00:10:41] 20% so I'm actually getting a 20% return on my money which is high that's why you got to start

[00:10:48] there yeah and I'll throw in something here too because I'm quite familiar with the games

[00:10:54] that we can play with our brains to justify things if you are on a balance transfer card or if you're

[00:11:00] on an intro APR like a zero percent where they yeah say say you have zero percent interest for a year

[00:11:09] do not call that zero percent return on your money to pay it off as a way to justify

[00:11:15] not putting money towards it if you're in one of those promo periods you should

[00:11:20] treat it as if it has the APR it will have after that period runs out yeah that's a good point

[00:11:26] if you do have that you kind of have the benefit of getting that return on your money without

[00:11:30] actually having to pay that interest while you're paying it off so yes good position and

[00:11:34] sometimes if you have any balance left after that promo period ends there are situations where

[00:11:41] you'll be you know you can have the interest levied against you from the balance you carried

[00:11:47] during the promo period yeah it's no good yeah okay so you pay off the high interest debt then you can

[00:11:55] then it's a good time to finish the emergency fund to have that three to six months so that

[00:12:00] you don't have to go back to accumulating that credit card debt right the idea is that an

[00:12:06] emergency probably or emergencies the most likely scenario to get into that high interest

[00:12:11] debt in the first place so now you're putting in a safety buffer zone so it doesn't happen again

[00:12:17] yeah good then now what's next get back to debt payments so moderate interest debt

[00:12:25] so this is going to be we already took care of everything over 10 percent this is going to

[00:12:29] be any remaining debt over four to five percent interest yeah they have they they're excluding

[00:12:36] your mortgage because that would be if you you'd never be able to contribute to your retirement

[00:12:43] accounts as much if you just kept putting all of your goals money towards your mortgage so

[00:12:48] anything in that you know four or five six range start paying yeah and and mortgage debt is always

[00:12:57] treated a little differently because you're generally building equity and you're not just

[00:13:01] burning that money on a high interest that even something like a car which is obviously

[00:13:07] something you need and can facilitate your income you're still going to lose money on that car

[00:13:12] over the life of your ownership of it your house is probably except you know except for some very

[00:13:21] unique scenarios generally going to make money on your house

[00:13:28] all right so now we have you know at this point you're getting an employer match you've paid off

[00:13:34] your high interest debt your moderate interest debt you have a three to six month emergency fund

[00:13:40] what's next so now we're looking back at episode 60 the last episode of last season about

[00:13:49] saving that 15 percent for retirement so the question to ask here is i've done all those things before

[00:13:58] start to think about IRAs Roth and traditional IRAs and max those out because those have a lot

[00:14:08] of tax advantages if you are yeah if you have your 401k you're getting the employer match

[00:14:17] then go back to the Roth or traditional IRA first and max those out but again because there's a yearly

[00:14:24] cap on what you can contribute to an IRA whether that's Roth or traditional you want to take advantage

[00:14:32] of that when you can because you can't go back and add more to it after the years right they're

[00:14:38] both lower caps than 401k so might as well cap those out first yeah and that's that's a $7,000 limit

[00:14:48] as of 2024 all right so go there max that out and see are you around are you at 15 percent

[00:14:58] of your pre-tax income going towards retirement in some way that's 401k IRAs but this point

[00:15:06] right it's that we're talking $2024 you say you have 7,000 going into your Roth IRA or your IRA

[00:15:14] whether that's Roth or traditional you're getting that employer match on your 401k contributions

[00:15:21] all of that added up is it 15 percent of your pre-tax income if not go towards 401k

[00:15:30] go with put the put the remainder into the 401k you're not getting the employer match

[00:15:38] you know above and beyond but there's still the tax benefits there so go until you have 15 percent

[00:15:45] of your pre-tax income right across all those because at this point you've only you've only

[00:15:53] you're only contributing enough to your 401k to get the employer match you can go up above

[00:15:58] that until you hit again the yearly limit which for the 401k as of 2024 is $23,000 all right now we

[00:16:10] start getting into the the nice to haves right you've say you've maxed out all of these things

[00:16:20] maxed out your IRA and your 401k then where should we look HSA

[00:16:29] yeah i mean the next question to ask is are you eligible for an HSA and so again you can only

[00:16:37] contribute to one if you have a high deductible health plan you may be in a situation like I

[00:16:44] find myself in right now where I do have an HSA from a former employer when I had a high

[00:16:51] high deductible health plan and I contributed to it that doesn't go away but you can't contribute it

[00:16:57] you can't contribute to it if you no longer have a qualifying health plan so if you are currently

[00:17:05] using a high deductible health plan and are eligible to contribute to an HSA

[00:17:11] you should start working towards maxing out those HSA contributions at this point yep

[00:17:17] some good benefits with those and again as of 2024 for a single person you can contribute up to

[00:17:25] $4,150 to your HSA cool but at that point you've got your HSA full 401k maxed out your IRA maxed

[00:17:40] out your emergency funds your debts paid off you may you may not be maxed out on your 401k at this point

[00:17:53] oh right because you're at 15% right you you only are increasing the the 401k contributions if you're

[00:18:02] not already at that 15% pre-tax because like like we said there are there are other options that

[00:18:08] are a little more optimal a little more efficient than maxing out your 401k at this point so one of those

[00:18:14] is the HSA if you're eligible and then that's triple advantage that's triple tax advantaged

[00:18:21] right do you don't pay any taxes going in you don't pay any taxes coming out you don't pay any

[00:18:28] taxes on the growth that's pretty nice it's pretty nice it's just more limited in what you can

[00:18:36] spend it on although once you get to a certain point in age it does act like a more traditional

[00:18:42] retirement account nice you can spend it before you hit retirement age though which is a difference

[00:18:50] on qualifying medical expenses right all right so now we're maxing out the HSA

[00:18:59] we're doing really well yeah you're in a very good place if you're getting

[00:19:02] this far down the flow chart starts to get into personal preference after this I think

[00:19:07] like if you have kids you might want to look at and you might want to pay for some of their college

[00:19:12] there are 529 plans or some sort of savings or investment account for them right I don't know I

[00:19:20] think yeah I think down this far at the bottom you could think about do you want to retire early

[00:19:25] put some more towards your 401k or IRAs backdoor IRAs these are for a future episode

[00:19:35] or I don't know any other sort of brokerage accounts or

[00:19:39] shorter term savings goals trips things like yeah this this gets a little interesting because

[00:19:44] if you're at this point in the flow chart you are doing quite well right you the only reason

[00:19:49] to continue increasing your retirement contributions would be to retire early

[00:19:55] but you may not be planning to retire early and so at this point I know we really espoused the

[00:20:03] 50-30-20 budget but you may get to a point and if anyone listening if either of us ever

[00:20:11] gets to this point we would be quite blessed but you could get to a point where 20% of your

[00:20:17] income is too much to be putting towards your goals yeah that's true you'd have max

[00:20:23] fine retire things out and then right yeah so you know maybe you're you're you're in a very lucrative

[00:20:30] career you are already all set for the future instead of putting more and more money towards

[00:20:37] your retirement years you could start using some of those to save towards things more in the short

[00:20:43] term right so that could be second third homes vacation homes yeah nicer vehicles

[00:20:51] maybe you do choose at this point to start paying down your mortgage early you like the idea of

[00:20:56] not having that mortgage just hanging whatever gives you a piece of mind I guess yeah vacations

[00:21:01] any anything and again you shouldn't if your income keeps going up you want to make sure

[00:21:05] you're still balancing everything but this far into the journey you definitely have a lot more

[00:21:11] options yeah and that's the goal is to make your way in town the flow chart

[00:21:18] if you can get towards the bottom you've done a lot of things right you're definitely set up for

[00:21:22] success and on a path towards retirement and having all of your goals covered so you'll know

[00:21:29] if harry and I make it there because the podcast will stop yep yep we'll be on a tropical island

[00:21:35] somewhere maybe not though keep sharing the good words right we'll tell you what it's like at

[00:21:43] the bottom of the flow chart so like I said we're definitely not at the end here everyone's kind

[00:21:50] of on their own journey in a different spot but this should give you even if you're not at some

[00:21:57] of the later steps give you an idea of how to think about where you spend that 20% goals portion

[00:22:05] of the budget yeah I always liked you know even before getting to the position financially

[00:22:12] I'm at now seemed like a you know fantasy you never thought you'd get as far down as you have right

[00:22:20] yeah so but even then it was great to already be reviewing some of these things and and you know

[00:22:25] knowing what to do when you get to a situation before you're in that situation is ideal you

[00:22:32] don't want to yes get thrown into a new chapter of your life and be totally lost about what to

[00:22:37] do you can prepare for that ahead of time so even if you're not quite at some of these later steps

[00:22:42] yet it's definitely still valuable to to understand what you would do at that point yeah

[00:22:49] so look at the look at the flow chart itself in the show notes check off where you're at see

[00:22:54] how far down you are now and start to progress and if you have some things out of order think

[00:23:00] about going in this order because this is you know the most return to the least return so

[00:23:06] could be a little bit more efficient than the order you're doing yeah or ask yourself why you

[00:23:11] why you're in that order because again this is a guideline this isn't etched in stone this isn't

[00:23:15] necessarily the 100% best way to do things in all situations so maybe just use it as an opportunity

[00:23:22] to ask yourself oh it says to do it this way I did this maybe you know did that make more sense

[00:23:30] my situation or should I have done it this way you know try to apply some sort of critical

[00:23:35] thinking as you go through this but it's not if you have any questions about you know something

[00:23:40] that a gap that we might have left out or um should I do it in this order or this order and

[00:23:46] will help answer all right that's another one seasons kicked off thanks so much for

[00:23:53] listening everybody and we will see you in the next one you've been listening to the more

[00:23:58] sense than dollars podcast