The 9-Step “Stairway to Wealth” That ANYONE Can Use to Become Rich

Mindy:
Welcome everybody to the BiggerPockets Money Podcast where we are interviewing Andrew Giancola today and talking about the Stairway to Wealth, the order of operations for your money.
Hello, hello, hello. My name is Mindy Jensen, and with me as always is my breakfast table date co-host, Scott Trench.

Scott:
Thanks, Mindy. It’s great to be here. And with that, omelette you continue on with this introduction.

Mindy:
Scott and I had breakfast this morning and it was delightful. And he was still able to come up with a pun, of course.

Scott:
I have some great skillet this, Mindy.

Mindy:
Oh my goodness.

Scott:
I had a skillet. I had a breakfast skillet, so.

Mindy:
I had quesadillas. I don’t know how to say… I can’t. Yeah, no, I’m not fast like that, so you come up with one, Scott. Let’s go.

Scott:
You can’t come up with cheesy breakfast puns the way I can.

Mindy:
Oh my goodness. Oh, I quit. I quit. You just do it all. Just kidding. I’m going to do mine still. Scott and I are here to make financial independence less scary, less just for somebody else, to introduce you to every money story because we truly believe that financial freedom is attainable for everyone no matter when or where you are starting.

Scott:
That’s right. Whether you want to retire early and travel the world or go on to make big time investments and assets like real estate, start your own business, or if you just want a financial plan that can help guide you on a correct course to financial independence and long-term wealth, we’ll help you reach your financial goals and get money out of the way so you can launch yourself towards those dreams.

Mindy:
Scott, I’m going to raise a toast to your breakfast puns.

Scott:
Oh, nice.

Mindy:
I didn’t come up with that myself though. I do have to give credit where credit is due, and that was from our producer, Kaylin, who is just as quick as Scott is. I am still way, way, way slow.

Scott:
Thanks a brunch. That was her message right now. That was fantastic, Kaylin.

Mindy:
Oh, my goodness. I can’t even-

Scott:
Touche.

Mindy:
… with all these puns. All right. It’s now time for the Money Moment where we share a money hack tip or trick with you, our listeners. Today’s Money Moment is, throw almost spoiled food in the freezer. Have those bananas seen better days? Chuck them in the freezer until you’re ready to make banana bread. Put that fruit or veggie in a smoothie or save it for a stir-fry or some soup broth. This cuts down on waste and your grocery budget. Do you have a money tip for us? Email [email protected].
Andrew Giancola is the host of The Personal Finance Podcast, a top 40 investing podcast. And He’s also the founder of mastermoney.co. Andrew, welcome to the BiggerPockets Money Podcast. I’m so excited to talk to you today.

Andrew:
Thank you guys so much for having me. I am really excited to be here.

Mindy:
Andrew, for people who Haven’t heard about you or your podcast, can you tell our audience a little bit about yourself and how you became interested in personal finance?

Andrew:
Sure. So my name is Andrew Giancola. I’m the host of The Personal Finance Podcast, and it’s a podcast that we started in 2020 trying to teach people how to build wealth. We started that podcast off and just my mom and a couple of friends were listening at the beginning and then we kind of grew it over time. And really, really passionate about teaching people how to build wealth. My background is actually in finance. I worked in finance for a long time and then built out some businesses and escaped the rat race, the 9:00 to 5:00 and started working on some of those businesses and then building out some of those as well. So I have a long history of doing a bunch of different things, but the podcast is one of the main things we focus on now.

Mindy:
Today we’d like to touch on your Stairway to Wealth, not Stairway to Heaven, Stairway to Wealth, which is a framework you created to build wealth. How did you create this order of operations?

Andrew:
So when I was starting to get my money, when I had my first job in finance, believe it or not, I made $30,000 a year. So really quickly early on I was living paycheck to paycheck. I was not good with money very early. And so I had to figure out a system that would allow me to actually learn how to build wealth. And I remember a moment in time when I went to go fill up my tank of gas, I think I was 22 years old, and I didn’t have enough money to actually fill up my tank of gas. I had an old Chevy Suburban, it took like 40 gallons of gas. And I remember how frustrated and mad I was at that point in time, so I vowed that I would figure out a way to actually get my money together and put together a step-by-step system that would allow me to do so.
So what I did was I researched a bunch of different personal finance experts that were out there, one of which was obviously Dave Ramsey, Ramit Sethi, a bunch of other folks, and they had all of these different systems that I thought would work for my life. So I started to implement some of those systems and take pieces of each one and then put them all together, and the Stairway to Wealth is actually what came together after doing all that.

Scott:
Andrew, why don’t you go through and tell us what the nine steps you’ve got here are in the order of operations form?

Andrew:
The nine steps to the Stairway to Wealth is, first, we lay the foundation. So the foundation is budgeting, automating your money, that type of thing. Then step 1 is the cash buffer, so having some money to protect yourself against life as you go through this process. Then step 2 is to get your employer match. Step 3 is to pay [inaudible 00:04:58] high-interest debt, any debt above 6% interest rate. Step 4 is getting your emergency fund in place, so having six months of your income with your emergency fund. Then step 5 is your Roth 401(k), Roth IRA or HSA level. Then step 6 we have max out pre-retirement accounts or invest in real estate. Step 7 is your wealth accelerators. Step 8 is future expenses like saving for kids’ college, those types of things. And then step 9 is paying off low interest debt.

Mindy:
I want to jump in here and ask the question about the cash buffer because while I like Dave Ramsey’s first three Baby Steps, I don’t like the $1,000 emergency fund that he suggests. I think it should be more. And it’s better than nothing, but it’s real easy to spend $1,000 or way more on an emergency. So what sort of cash buffer are we talking about here?

Andrew:
So the big thing that we wanted to shift was that Dave’s number just never changed. So it never ever changed. It’s always been $1,000. Obviously, that amount of money is not worth the same amount as it has been in the past. So the biggest thing we wanted to change is look at first the average emergency fund and what it is. And the average emergency is usually around $2,400.
But I do like the idea of… Like if you know Brian Preston and Bo from the Money Guy show, they have a system where they put into place where you save up enough for your highest deductible. And I really like that idea because what that does is it protects you against anything in life where you can utilize your insurances and figure out what the highest deductible is. So one way that we look at that is we go through and say, “Hey, what is your auto insurance deductible? What is your home insurance deductible? What is your medical insurance deductible?” Whichever one’s the highest, just save that amount so at least you can get coverage on some of those deductibles and protect yourself as you’re proceeding through some of these steps.

Scott:
I think this is a great topic. And there’s no right answer to this cash buffer question. I think I’m not necessarily saying I agree one way or the other, but I think if Dave Ramsey were here, he would say, “Well, the reason it’s $1,000 is because even if you have the emergency that’s $2,400 your highest deductible, I’m sorry, it’s a theoretical emergency. And you have emergency right now most likely if you’re in the situation starting with his baby step 1, your step 1 here. You might as well just start paying off your emergency debt. So what would be your answer to that response from our fictitious Dave Ramsey impersonation that I’m doing?

Andrew:
Yeah, I think that is one great consideration because high-interest debt is obviously a huge wealth killer, which we’ll get to here in a second. But one big thing is that I think when emergencies come up, a lot of folks, if you look at a lot of the data, when emergencies come up, that is what puts them even further backwards than they already are. And there’s a number of different situations where that can happen. But I just think life is going to happen to you. It’s not when. It’s not if it’s going to happen to you. It’s actually when is it going to happen to you. And you have to be prepared for that and at least have enough to protect yourself against that and then you can start attacking debt.

Scott:
Well, again you diverge here. So with step 2, could you walk us through what step 2 is and why you choose to do something other than pay down high-interest debt next?

Andrew:
Sure. So step 2 is to get your employer match. Now, if your employer does not offer an employer match, then obviously you can skip onto the next step. But when it comes to your employer match, this is a 100% rate of return on your money. This is a really, really powerful thing. And so it’s so incredibly important to make sure you get that.
Now, if you’ve never heard of an employer match, all this is is that when you open up a 401(k) plan at your employer or TSP or whatever else, they will end up matching a percentage if they offer this actual premium thing that they offer here. So for example, if you put in 3% in your 401(k), they will match 3%. It just depends on what the actual plan has available to you. And so to show how powerful this can actually be, if you take an example of someone who makes $100,000 per year and they got a 3% employer match, you do a 3% match and they do a 3% match every single year and you’ve got an 8% rate of return on that match over the course of 30 years, it’s amazing what can happen and how powerful this can be.
So just on that 3% match, you would have $704,000 over the course of 30 years at an 8% rate of return if you just got that match. If you’ve got a 4% match, it’s $938,000. At a 5% match, it’s $1.1 million. And I have friends who have 6% matches and did the math for them, it’s $1.4 million that you’d have in that account if you got that 8% rate of return. So it’s an incredibly powerful thing to take advantage of because it is free money.
I love free money. I don’t know about you, Mindy and Scott, if you guys love free money, but that is the way that I kind of think about this and try to take advantage of this.

Mindy:
I love free money. And if anybody doesn’t, you can email me for my address and I’ll share that with you. You can send me all the free money that you don’t want.

Andrew:
And then next, we’re going to talk about high-interest debt and high-interest debt is making sure that you pay down that high-interest debt. So you can think of things like credit cards, personal loans, all of those different types of things because those are wealth killers. So we want to get rid of that high-interest debt as fast as we possibly can.

Scott:
Awesome. So we have 6% is this cutoff between high and low interest. Coming into step number three here, why 6%? Why are we cutting it off there? And is that going to change if interest rates remain high in your view?

Andrew:
So for me it will not change much if interest rates remain high. We really started out at 5% and adjusted it to 6% because the rate of return on average for the market is somewhere between 7 to 10%. And I think 7% is kind of the conservative approach that you can look at this for. And so the reason why we’re looking at doing that is because of that reason. I think your dollars are more productive in the market than they are paying off that low interest at below a 6% interest rate.
But it is very difficult right now at the time that we’re in. At the time we’re recording this, interest rates are rising above 7, some are even above 8% when people are getting mortgages right now. So it is a very difficult situation where you have to think through that. But I think even specifically for mortgage debt, that is something that you can consider when rates go down and we have no idea when they would go down. But if they do go down, then you can kind of refinance out of those and go from 8% down to a lower interest rate.

Scott:
Awesome. Do you recommend fully paying off every penny of high-interest rate debt before moving on to step 4? So every debt that’s above 6% interest, you pay down 100% before moving on to step 4 in your nine step program here?

Andrew:
Exactly. So that’s kind of the thought process that we have specifically as they get higher. Because for most people, this high-interest debt level is going to fall into things like credit card debt or personal loans. And if you look at the numbers on things like personal loans, now they’re rising rapidly, which I was very surprised looking at the numbers. The average person has 12,000 to $14,000 in personal loans now. So a lot of this high-interest debt is going to fall into the credit card or personal loan category.

Scott:
Well, walk us through step 4 here then. What’s the emergency fund and how much should I save up and why that amount?

Andrew:
Sure. So the emergency fund is one of the most powerful things that you can do to protect your money as you start to build wealth. And like we said with the cash buffer, it is not if an emergency is going to happen, but when will an emergency happen. So you have to have an emergency fund in place to protect yourself. And there’s a number of different ways that you can do this, but my favorite way is to put it into a high-yield savings account because that’s just going to keep your money there. With somewhat of a higher interest rate, it’s going to keep it safe.
And when it comes to how much emergency fund you should have, I truly believe that you should have six months in your emergency fund for most financial situations. And the reason why I think about that is your emergency fund is in place for emergencies. One of the biggest reasons it’s there for is to protect you against job loss. So if you think of the process of losing your job, what’s going to happen is you’re going to have one to two months where you are going out and applying for jobs. Maybe you have another two months where you’re going through interviews, and then finally you figure out which job you’re going to land on. So six months kind of gives you that runway and allows you to be able to protect yourself from job loss.
But it’s also for a number of other things, if your car breaks down, if you have issues with your house. It also allows you to invest in rental properties because as you both know, investing in rental properties, you have to have some cash reserves available there before you start doing something like that. And it’s also protection against the things that you don’t like in life. For example, if you have a brand new boss and you absolutely hate that boss and they’re taking away some of your mental health and all these different things, then it’s going to allow you to protect against that as well.
So there’s a lot of really cool stuff that’s available in the emergency fund that’s going to allow you to at least kind of protect yourself against life. So I like six months. We started to say three to six months, but three months for most people seemed like they were still getting into sticky financial situations with that three-months timeframe. So I love at least having six months. And then if you’re self-employed, I like to have an even longer runway, nine months to a year.

Mindy:
Okay. I love the six months. I really get the heebie-jeebies when I hear the other guy, Dave Ramsey, say three to six months because I think a lot of people who are in the position that they need this kind of help hear three months, and they’re like, “Oh gosh, I don’t know if I can ever get to three months, I barely get to three months and then I stop saving.” They don’t get to three months and then maybe start working on the next one while continuing to save to six months. So I love that you’re suggesting six months to start with.
How does step 4 and step 1 work together? So step 1 is create a cash buffer safety net, which you alluded to was the largest deductible or some amount like that. And then step 4 is six months of expenses. Do you still have your largest deductible in addition to the six months of expenses or are you just adding onto that?

Andrew:
That’s a great question. So this is something where you have two options here, one of which you can keep that largest deductible thing for things like your car breaking down, your house having issues. Any of those types of emergencies, you can keep it available there if you want to. And/or you can roll it in to start your emergency fund. Emergency funds are really hard for a lot of people to save up for because it’s thousands and thousands and thousands of dollars you have to have saved up to protect your income. So you can roll it into your emergency fund as well and just have your emergency fund as your cash buffer as you build that out. And/or if you make a high enough income, you can have both available. One is protecting you against things like small things that happen in life and the other one is protecting you against job loss or having a sabbatical or whatever else you want to do with that money. So you have two options there depending on your situation.

Mindy:
I like to be as conservative as possible. Especially for people who are just starting to fix their finances, they’ve never paid attention before or they’ve discovered that they’re in a big hole and they want to start paying attention now, it can seem really daunting to have all of this money just sitting there doing “nothing,” I say in air quotes, but it’s not doing nothing. It is waiting for an emergency. So how much fun is it to get hit with four flat tires or whatever and then be like, “Oh gosh, how am I going to pay for this?” as opposed to, “Hey that’s what that emergency fund was for.”
So I would suggest have them both. Do step 1 and… You don’t do all of this in one day. You don’t just knock step 1 through 9 out all in one day or all in one week. This is a long process, but it’s better than starting from zero or starting from the negative when you finished with step 9 or step 1 or step 2 or wherever you are, you’re still in a better position than you were when you start paying attention. So it’s every day is more progress.

Scott:
Andrew, who’s the target of these nine steps? Who are you writing them for?

Mindy:
So originally, I wrote them for myself. This was a system I kind of put into place for myself, a young professional who was trying to figure out how to get their money together. And so for most people, that is what this is for, is for people trying to figure out how to get their money together. They want the step-by-step guide for this. But if you are a few steps in advance already, you can jump right in and figure out, “Hey, well what investing order do I need?” Which we’ll talk about I’m sure soon.
And you can just use the investing order if you want to do it that way. If you already have your emergency fund, you don’t have any high-interest debt, you can just jump into that step. So it just depends on what stage you are in life. But for a lot of folks they want that step-by-step guide to figure out exactly what they need to do, because they’re trying to figure it out. They get TikToks all day long or they’re seeing things on social media and they’re just trying to get through the weeds here. And so that’s what we created this for, was I used it in my own life. It worked really, really well. And then I was able to teach other people the same exact system I used.

Scott:
Awesome. I think that’s important to call out here. This system, it does not seem, is written for or built for the totally broke person who has proven that they’re totally irresponsible with money for many years and needs a hard reset, which is what Dave Ramsey’s program is for, right? Dave Ramsey is for folks that have completely botched it with their personal finances and he’s all about that, “Whatever your plan was wasn’t working. You should start again with my plan here.”
And I think in context of his first three Baby Steps, which are, one, save $1,000, pay off all debt except your home mortgage, and then build a three month to six month emergency reserve, well, you can get away with three month emergency reserve if you’ve paid off all of your debts, including your low interest rate ones because you don’t need quite as much of an emergency reserve.
In your order, you’re doing one that’s for someone a little bit more savvy, wants to get a little bit more returns there maybe, hasn’t made a long history of mistakes and so can responsibly continue to maintain some debt on their balance sheet I think. And so in that case you need more of an emergency reserve in that particular case. And then I think from a super aggressive person as well, someone who is willing to go all out in pursuit of financial dependence, which may be many listeners of BiggerPockets Money for example, you’re saving 50 plus percent of your income, your after tax take home pay. Then I think again some of the rules begin to change for you or the guidelines. You can afford to be much more aggressive when you’re saving that high of a percentage of your income paradoxically because you’re so conservative with your household budget.
So would you agree with that from just a philosophizing high level viewpoint?

Andrew:
I absolutely would agree because as you stated, you really do have to be responsible with that low interest debt if you’re going to go about and doing these steps. And for a lot of people and a lot of people in my audience as well, and I was very interested in this, I was very interested in financial independence, so you can kind of tailor this into financial independence by hitting all these steps each and every single year. And you can see as we get to some of these later steps, you have to have a higher income to hit all of these steps in a row. So that’s kind of how we tailored it as well, was to make sure that these are people who can actually manage that low interest debt and be able to kind of go step-by-step and follow the steps and stay disciplined.

Scott:
Well, okay. So with that, we’ve got our six-month emergency reserve built. What’s coming next and why we invest in there?

Andrew:
Sure. So the next step is the Roth IRA and the HSA. So this could be Roth 401(k), Roth IRA or HSA. So it’s just the Roth level there. And the way that we look at this is you can do either/or, you can do both, but you have a couple of options here. So for the Roth IRA, I absolutely love Roth accounts for two reasons, the tax-free growth and then being able to pull the money out tax-free. So you can contribute money directly from your paycheck, it’s already been taxed out of your paycheck, the money grows tax-free and you could pull the money out tax-free. So if you do this over the course of 30 years and say for example you maxed out your Roth IRA at $6,500 per year, then what happens here is you have little over a million dollars, $1.1 million in that account over the 30 years. And $800,000 of that is going to be the growth. And so this is completely tax-free money, $800,000 of tax-free money. There’s not many places that you can do something like that with the Roth IRA.
And then the HSA is probably one of my favorite accounts that are out there. I call it the super retirement account. But the HSA has a couple of different caveats. So it stands for Health Savings Account. And you contribute money, tax-free. You can invest the money inside the HSA and it can grow tax-free and you can pull the money out tax-free as long as you have a qualified medical expense. And that is the major caveat.
Now, the IRS has a huge list of qualified medical expenses that you can reimburse yourself for. I just save my receipts and then I put them in a Dropbox and then I just keep a spreadsheet of how much I’ve had available. And what you do with the HSA is if you don’t use the money for qualified medical expense by the time you turn to age 65, it just turns into virtually IRA essentially. And so that’s the cool thing about the HSA. But it has those triple tax benefits if you have those qualified medical expenses. Now the other caveat with the HSA is you have to have a high deductible health plan. So if you don’t have a high deductible health plan, you don’t qualify for the HSA, which is why we have both the Roth and the HSA at this level.

Mindy:
If you have both accounts, which one do you recommend maxing out first if you have the Roth IRA available to you?

Andrew:
So if you have both available to you, and even if you make too much for your Roth IRA, I love the backdoor Roth IRA as well, but if you have both available, I personally will contribute to the Roth first, then go to the HSA. And the only reason I do that is because I shift from a high deductible health plan to a regular health plan a lot of different times so I can’t max out every single year. Specifically in the years where my wife is pregnant, for example, we know we’re going to have a lot of different hospital bills, then that’s when I will make those shifts. But for the most part, I go Roth because I know I’ll be able to at least max out that Roth every single year, then I go back to the HSA. So that’s just the way I think about it. But a lot of people would actually reverse that because of those triple tax benefits.

Scott:
Well, one thing to call out with the HSA as you alluded to here, and again just to reinforce and hammer the point home, is the HSA compatible healthcare plans, by definition, have very high deductibles and very high out-of-pocket maximums. So there are often essentially a worse healthcare plan than the ones that are not HSA-compatible. And so a lot of reasonable people will switch back and forth between them. Just like you said, it’s probably a better financial decision to skip the HSA. And in a year you know you’re likely to have high medical bills for example, you think there’s a high probability, move to the low deductible, low out-of-pocket max plan and forego the HSA benefits that year.

Andrew:
Exactly. That’s one of the biggest keys with the HSA, is that you have to kind of be flexible with how you’re handling those plans specifically, like you said, if you have high medical bills that year, that’s a big key there.

Scott:
Okay. So now after all of this, we’re on step 6 here and we’re into the 401(k) or real estate investing, you have a divergence here. So how do you think about that divergence? Walk us through this step and why there’s a divergence and what routes you took personally.

Andrew:
Absolutely. So for me specifically, one of the biggest things here was that when we started to talk about this, we had the 401(k) at this level and then we had real estate actually at the next level. But what I realized very quickly was I didn’t even actually take that path. I did the 401(k) and real estate at the same time.
Now when I did not make a lot of money, I did not max out my 401(k) at that time, but I would invest in my 401(k) and I would invest in real estate both at the same time. And so this was something where when we went through this process, I realized very quickly that you can accelerate your path to wealth if you put real estate investing at this level. Now, the thought process of having it at this level is you have that emergency fund already in place. You have some retirement accounts that are building up if you have a Roth or an HSA there, and now you have real estate available to you. And/or if you don’t have any interest whatsoever, which real estate’s obviously not for everybody, if you don’t have interest in real estate, then you can go the 401(k) route. So those are two options there that are available or whatever your pre-tax account is that you have.

Mindy:
Okay. Step 7 is wealth accelerators. So I would like to hear what you have to say about that and how that differs from step 6, specifically the real estate investing part.

Andrew:
Sure. So the real estate investing part on that front for wealth accelerators is, for a lot of people, if you want to do things like flips for example or maybe some bigger deals, that’s where we have wealth accelerators here. But in addition, when it comes to real estate, the other side of this is, I’ve gotten really interested in things like boring businesses. So things like automatic car washes or laundromats or all those different things are really, really cool stuff that you could be investing in. And I think it can really accelerate your path to wealth, but you have to have some of these other things covered ahead of it before you actually start investing in that kind of stuff. So that’s where we kind of think through the wealth accelerators and then bigger real estate deals, and/or flips are another thing that we have here as well in the wealth accelerators.

Mindy:
So what do you mean by real estate investing in step 6 when step 7 is the larger deals and flips?

Andrew:
So the way I did it in step 6 was learning how to invest in real estate. So I would invest in single family, small multifamilies, those types of properties early on in step 6 and that’s how I personally did it. Now, I think you could scale up to much larger deals in step 6 as well if you know what you’re doing, you know how to run the numbers, you understand how to invest in real estate. I think it depends on your knowledge level and where you are. But at the same time, I think you could do it in either/or. But if you want to scale up to those much larger deals and you have not done that yet, then the wealth accelerator level is where I would consider doing something like that.

Mindy:
Okay, I like that you have these so far down the list of your nine steps. You’re in the last third of the nine steps here and I am going to take a moment to plug this little website called biggerpockets.com. If you want to start investing in real estate, you absolutely need to be educated in the process. Sure, anybody can buy a house and you can make money in real estate. I know. I’ve done it. Scott’s done it. Andrew’s done it. But you can also lose a lot of money in real estate if you don’t know what you’re doing. So if you want to get more information about it, you want to learn about real estate investing, learn how to do it the right way, go to biggerpockets.com/forums. Okay, end rant. Now, this show is sponsored by biggerpockets.com.
Let’s talk about… We did step 7. Step 8, future expenses and why is this all the way down in step 8 and not before. So what do you categorize as future expenses and why is that almost at the bottom?

Andrew:
So for future expenses, this is a big one that a lot of people do too early. And for me, we talk about the oxygen mask method, which other people have talked about as well. But what that means is like when an airplane is going down, you take care of your own oxygen mask first and then you help somebody else along the way. This is the same thought process that you have to take with your money. You have to take care of your retirement and your wealth building first, then you can help take care of others. So with these future expenses, these are things like saving for your kids’ college, a 529 plan or however else you want to save for your kids’ college.
Along these same lines is saving up for wedding expenses for your kids, those types of future expenses if you have a sinking fund or something along those lines for that, or investing for your children. This is a topic we talk about all the time on our podcast, is investing for your kids. And I think it is one of the most powerful things you can do for your kids, but doing it too early when you’re not saving for your own retirement can be a detriment to your financial situation. And then lastly is just saving extra funds for your retirement, like having extra cash on hand or longer emergency funds. Those types of things are all the future expenses that we’re talking about here.
So this is something where it’s very difficult to not put your children before you because that’s what you do and everything else in life. But at the same time, you got to take care of your own retirement first, then you can take care of everyone else.

Mindy:
One really awesome quip that I have heard about that is you can always finance your kids’ college, you can’t finance your retirement.

Andrew:
Exactly. And that’s kind of the thought process along this whole thing because at least there is always student loans available. And obviously, if you are interested in finance or personal finance or FIRE, all these different things, we do not want to have our kids taking on loans, but sometimes in a lot of situations, that is what’s available to you. But there is no loan for your retirement, so it is so powerful to make sure that you take care of your retirement first.

Mindy:
Okay. And can you do future expenses? Can you start that in tandem with any of the other steps? Or would you recommend waiting until you’ve got to your pre-tax or real estate step 6 and your wealth accelerators in step 7?

Andrew:
So I think if you have your retirement goals and you’re hitting those retirement goals, so say for example you look at your retirement number and figure out that it’s 25X your expenses, say you need $80,000 per year and you multiply that by 25 and you have $2 million available there, if you’re hitting and on track for those goals by the time you want to retire, then I think it’s okay to start saving for those future expenses. Maybe you have no interest in wealth accelerators, you just want to save in your retirement accounts or in the market and then you want to move on to saving for your kids and helping your kids out. A lot of people are in that situation, and so that’s where I think you can save at the same time in tandem. If a step does not apply to your specific situation, you can always skip it and go to the next step.

Scott:
I think that’s an important point to drill into here. And again talking about Dave… Because there’s nine steps here, people I think will naturally compare to Dave Ramsey’s Baby Steps. We start with the three to six month emergency reserve in step 3 and then the step 4 is invest 15% of your household income in retirement. People don’t have to agree with that, but it’s very clear where the breakdown is, right? Once you’ve even started investing 15% of your household income in retirement and have your three to six month emergency reserve, now I’m going on to step 5.
I think that’s a great question that Mindy was asking there, and I’d love to drill another layer of depth in, when… Okay, I’ve maxed out my Roth and HSA. That’s super clear, steps 1 through 5, know exactly where the cutoff is. Where is that cutoff between real estate investing and wealth accelerators for example though? Is it step 6 is get to your retirement number at 4% rule with your pre-tax IRA contributions, make sure you’re on track for that, then go to real estate investing for a certain amount, that’s 6.5, and then 7 is wealth accelerator? Or how do you break that down? How do you advise people on that?

Andrew:
That’s a great question. So that is one big differentiator that we’ve had in the past. When we did this the first time we had that question come in all over the place, and that was the big differentiator. So you have to figure out what your end goal is before you start this. So if your goal for example is to have a tandem and a flexible thing between investing in retirement accounts and real estate investing, you have to do two calculations here. A, you have to figure out how much cashflow you want to have with your real estate investing for that freedom number for say it’s 50/50. For 50% of your income that you need, you need to figure out how many properties you need to have available to you to actually cover that 50% of your expenses and your goal, whatever your goal is in retirement.
And then the other 50%, the target needs to be hit for that 25X expenses in your Roth IRA, and maybe you have to trickle some into your 401(k), as well in order to be able to invest enough to hit that number. So that’s kind of how we think about both of those, is making sure that your goals ahead of time and then having those trickle in as you go through that process.

Scott:
Okay. So after step 5, when We’ve maxed out our Roth and/or HSA, or as we approach that more precisely, there needs to be a precision of goal setting or precision of planning that we go through that really narrows in exactly what we want that end state portfolio that we’re going to try to back into look like. Is that right?

Andrew:
Exactly. So you have to have those numbers nailed down so that if you’re going to do both, if you’re going to do a hybrid method is what we call it, if you’re going to do both of those things, you need to know what the goals are for each one and just understand the math. The math is very easy, but it’s just understanding the math and learning how it works is going to be the best thing that you can do going forward.

Scott:
Awesome. And then that informs how much to contribute to my 401(k), how much to contribute to my real estate down payment fund, how much to contribute to starting a small business or buying a small business, those types of things. How much to contribute to college or wedding funds, all that kind of stuff. And then when to cut the investing and begin paying off the low interest debt, which is your last step.

Andrew:
Exactly. I know how difficult it can be to save for multiple savings goals especially if you only make a certain amount of money. So putting together this plan and having this in place and then kind of mapping out those goals is going to be one of the best things that you can do. It’s one of my favorite things that I did early on. Because once you start to see this to work, it’s really, really powerful to watch that compound.

Scott:
Awesome. So let me pose a hypothetical here. We’ve got a $60,000 per year income earner. Ambitious to get their finances in order. Not a crazy bad financial situation. And we’re starting to go through this. So we save up the cash buffer. And by the way, the expenses are, let’s call it 4,000 a month. So $48,000 a year, they’ve got about 5,000 or $6,000 to play with on top of that. So we save up the emergency reserve in the first couple of months. We take the match and that’s 4% of the paycheck, so that’s… What is that? Four times… That’s about 2,400 bucks there, but it’s pre-taxed. I still have another couple thousand to play around with. I pay off my debt that takes me about 18 to 24 months to pay off all my high-interest debt, and I’ve got this emergency fund.
But the problem is that after I max out my Roth and/or HSA, I have no additional cash left over with which to pursue the other wealth building avenues here of buying a house or house hacking or real estate investing or contributing more to my 401(k) or trying my hand at a small business, and I’m ambitious to do those things. How would you advise that person proceed assuming that they’re already optimized on the income front.

Andrew:
So if they are already optimized on the, income front you’re saying they can’t increase their income anymore, that would be the first step that I would look at if they can’t increase their income anymore. That’s what I did because I was in this exact situation where I was going through and maxing out everything that I could. I went to my Roth and I went to my HSA and doing those two things. And then beyond that, when I wasn’t making much money, then I looked on the income side to try to increase my income. That’s the biggest thing that you can do in that front.
But if you are really, really interested in something like real estate investing for example and say all you have per year is to be able to invest a certain amount and you’re max on your Roth IRA for example and you have maybe just a little bit leftover, but you are really gung-ho on real estate investing, I have no issue with somebody allocating more dollars towards real estate investing if they know what they’re doing and understand that because I do truly think that you can accelerate your path to financial independence through real estate investing. We’ve seen so many different examples obviously on this show, on BiggerPockets as well, where you’ve seen people be able to really accelerate their path to financial independence through real estate investing. So I have no issue with that, but I think the number one thing is to increase your income so that you can allocate more dollars towards that through side hustles and a bunch of other options that you have available.

Scott:
Awesome. Yeah, I just think that’s a challenge that from a practical sense folks have when they’re confronted with lists or these step-by-step approaches to building wealth. They are right answers. Yours is a right answer here to that. But then I think it’s great to hear that even you’re acknowledging, “Hey, my rules, you should break them if you really want to get into real estate and begin contributing there, more heavily in there.”
And I think that’s the big challenge, is there’s a sacrifice that has to be made here at some point if you want to get ahead in the wealth building journey. I love how your first instinct is, the right answer is work harder, earn another source of income, figure out how to increase your income because that solves a bunch of these problems. And now you can go down the ladder here of taking a match, maxing out the 401(k), HSA, Roth IRA and have some surplus left over in real estate. But the consequence of that, what’s implied there underneath is the grind, right? There’s a multi-year grind if you want to actually go through all of these steps, maxing them all out and then getting into having enough leftover to begin actually pursuing these other wealth builders.

Andrew:
Exactly. You’re spot on on that because that is one of the things that’s actually baked into this. Now, the beautiful thing about this is I really am flexible once you get to the investing zone. So I’m not really flexible if you’re not going to pay your high-interest debt off or any of that. I don’t think you could skip any of those steps when it comes to paying off your credit cards or anything like that. But outside of that, once you get to the investing zone, there may be someone who’s a super high earner and it makes more sense for them. Their CPA tells them, “Hey, you need to contribute to your 401(k) first before you go to the Roth IRA because we need to get some of these pre-tax benefits here.”
So there are situations like that where it is flexible once you get to this investing zone, especially if you are really proficient in one area, say for example like real estate investing, you’re an amazing real estate investor, then that may be the best path for your dollars to go is towards real estate investing instead of putting it into the market. So I love to have the hybrid approach, that’s what I did. But it may not be for every single person. And so once you get to this investing area, you can be flexible on that front.

Scott:
Yeah, I completely agree. I think there’s one right answer or one set of principles that involve bare bones cash emergency reserve or safety net or $1,000, whatever it is, right? We could debate the number whether it’s 1,000 or the smallest deductible or the 2,400 or whatever. Then it’s, crush your high-interest rate debt or bad debt. I love taking the match from your employer, I think that’s right, and not talked about enough here. And then building out some sort of semblance of an emergency reserve. And then from there, the options explode. And that’s where a prioritization has to take place that’s congruent with your goals. And I think the Roth HSA is a perfect one from there. But then after that, I think you’re, right? Who knows what the right answer is there? Is that the wedding fund? Is it real estate? Is the wealth accelerators in that? And so it seems like there’s these steps 6 through 9 are a set of guidelines, starting suggestion, but feel free to break them and go after the one that’s most important or relevant to your goals there.

Andrew:
Exactly. And I think that’s why it’s so important to kind of look at it that way and have that flexibility available, is because each situation is very, very different. And it’s just going to change for each person on what the optimal way to go is.

Mindy:
Like I said earlier, this isn’t all in one day that you’re doing steps 1 through 5. So I think by the time you get to step 6, you’re more comfortable with your money, you have a more fundamental understanding of how it works, your risk tolerance, what you want. I mean, I can see this taking years to get to step 6. 2, 3 years to get comfortable to this step 6 period. Especially if you’re just starting out, you’re making $30,000 a year. I was making 24,000 when I started out and thought I was just rich. But at $24,000 a year, you can’t max any of these things out and still be able to eat. So getting comfortable with all of this, then you start thinking about your pre-tax, your real estate investing, your wealth accelerators.
I mean, I wasn’t thinking about wealth accelerators until, I don’t know, five years ago, 10 years ago. And even then I was like… I mean, outside of real estate, which I don’t… You’ve got it on step 6 and I’m thinking of wealth accelerators as businesses, but I see how that could be real estate too. But yeah, once you get to this point, then you’re more able to diverge from the path and take this as more of a guideline than a set in stone rule.

Andrew:
And you’re spot on that because the big thing with this, is this is the long game. This is how you have to think about this, is throughout your financial life. It took me 10 years just to get to the wealth accelerator level where I was doing all of these things and at that wealth accelerator level. So that, I think, is really, really important distinction is to make sure you understand this is just a long game. This is something that it takes time to build wealth. And so this is where you really need to land contrary to what things on social media or whatever else talks about. They say it happens in two or three years, but really it does take a long time and you really have to build up to some of this stuff.

Scott:
I love that. I completely agree, right? It’s taken me 10 years to get to the point of thinking about those types of things as well. What do you say to all of the people, all the content, all of the hype that’s going on around skipping steps 1 through 5 here and going straight to the buying a business when you have no money or no income, no credit and those types of things? What would you say to somebody who’s seeing that, really interested in it, and excited about that, doesn’t want to spend the next four years going through steps 1 through 5?

Andrew:
I can see how people can be enticed by something like that. But the biggest thing is your risk level, your personal finance risk level increases significantly when you do something like that. So if you get into something without having, say, cash reserves for example, and anything goes wrong, then you are having a huge financial detriment and you are going backwards 10, 15 steps even from what we’re talking about here if you have some catastrophic financial event.
And we’ve been talking about Dave Ramsey’s Baby Steps the whole time. This happened to him in his 20s where he was over leveraged when it came to real estate and he talks about this all the time and he had to claw his way out out of bankruptcy and all these different things because he skipped all these steps. And then that’s where he started the Baby Steps as well was because of that reason. So there’s a bunch of different examples of people. And for most people, there’s not a lot of actual real examples out there. I’ve seen a lot of people, it looks like they’re lying to be honest. So I think realistically, I think it’s going to take you more time over that timeframe than what most people say.

Scott:
I think that I would completely agree with you and I’d say we are here on BiggerPockets Money and you are the host of the Personal Finance Podcast, because the right answer is to spend several years fixing your financial foundation and building it to a strong position and then make highly leveraged investments into things like real estate investing, your first home, or a business, a small business for example.

Andrew:
One thing I could say is if you are, say for example, you’re really anxious to get started building a business or real estate investing, one key that you can do over this timeframe as you’re starting these steps is learning how to do it during that time. That’s one of the most powerful things that you can invest in your time into, is that knowledge.
I remember before I started real estate investing, I listened to the BiggerPockets Podcast. I listened to every single episode for three straight years, went through all the forums. I was always on there all the time. And so I bought every book, everything. And so I spent so many years just learning and understanding it so that once I started, at least I had that baseline knowledge. Obviously, there’s a lot of things that in real estate investing where you have to learn by doing. But I had that baseline knowledge and saw so many different examples of mistakes that people made just by listening to some of those episodes where it allowed me to actually have just more savvy when it came to investing in real estate. So I think that’s one of the most powerful things that you can do as you start to go through some of these steps.

Scott:
Love it. I think it’s great. We’re obviously a big fan of BiggerPockets here as well. I think that’s a great use of time with it. And I also want to point out that combined with that knowledge and that investment you made in your self-education, you also had a margin of safety with your six-month emergency reserve after completing steps 1 through 5 here.

Mindy:
That’s why you have the reserves in the first place. All these people who say, “I don’t have any… Oh, my banker is demanding that I have six months reserves.” Yeah, you want to know why they want you to have that? Because they know that you don’t have any experience and they have experience. You can either learn from somebody else’s mistakes or you can be the mistake that somebody else learns from.

Andrew:
Exactly. And you’ve nailed it because that’s a quote Warren Buffett had I read a long time ago, I remember he said, “You can learn from most people’s mistakes” but something along those lines. And so I’ve always taken that to heart and kind of listened and tried to learn from other people’s mistakes so that I don’t make those same exact mistakes.

Mindy:
There’s a lot of the same mistakes that are being made over and over again in real estate. Back to the BiggerPockets forums, biggerpockets.com/forums, if you go in there and you read, people will say, “Oh, my sister wants to rent from me. Should I rent to my sister?” Here’s 1,000 people saying don’t rent to friends or family. Do you know why they’re saying that? Because they rented to friends or family and it was a mistake. Trust me, it’s a mistake. It’s always a mistake. Don’t rent to friends or family. You think it’s going to be different for you? It’s not, 100% of the time. I can guarantee you, it’s going to end in a disaster and a ruined relationship. Just make life easy and learn from somebody else’s mistake.

Andrew:
Exactly. I remember listening podcasts, for example, with my first rental property. My first tenant that I had in there, they said, “Hey listen, I don’t have enough money for the security deposit for my last month’s rent.” But I remember reading through every single book and listening to the podcast and how many things could happen if you actually went through that process. So just even little things like that will help protect you and your finances by learning all that stuff. So it’s really, really important to have that knowledge ahead of time, especially with things like real estate, buying boring businesses, all that kind of stuff.

Scott:
We really appreciate this discussion, Andrew. Thank you for sharing the awesome steps that you have here for building wealth. We really appreciate it. And where can people find out more about you?

Andrew:
Sure. So you can check me out on The Personal Finance Podcast, whatever your favorite podcast player is. And if you want a PDF version of this, we have it at mastermoney.co/stairwaytowealth where you can see it visually if you’re more of a visual person when it comes to some of these steps or you just want to hold onto those so you can remember which steps go in what order. And thank you guys so much for having me. This was a really fun conversation.

Mindy:
This was a lot of fun. Thank you, Andrew, and we will talk to you soon.
All right. That was Andrew. Scott, I like his Stairway to Wealth because it’s nine steps, it’s not six, and He’s not telling you to save up a nominal amount. I really, really, really love that step number one is create a cash buffer that is not an emergency reserve. It’s just to get you started. I love his thoughts on that, it’s not $1,000. I really don’t like the $1,000 emergency reserve that Dave Ramsey suggests. I really like his lowest deductible or the average American emergency is $2,400. Start there. But that’s just a start. If having that much money doesn’t make you feel comfortable, increase it before you start on step 2, which is the match for your employer. What did you think of his nine-step process, Scott?

Scott:
Yeah, I’m always immediately kind of questioning of a process for wealth building, right? It’s got to be predicated on who it’s for and I’m glad he knows exactly who it’s for, right? This kind of professional who wants to achieve financial independence but isn’t in a complete mess, starting from zero or whatever with that. So I think that’s really important because there’s no one right answer to building wealth. It depends on your goals. And I love how he also acknowledges that once he gets past the initial hurdles there of an emergency reserve and a strong financial foundation, the options begin to multiply and there’s lots of right answers and the divergence between steps really depends on your financial goals.
So I think that it’s a wonderful system for folks who are willing to invest more time, for example, in studying this and be a little bit more aggressive than, for example, Dave Ramsey’s Baby Steps who know that they’re going to have to make their own choices. They can’t just surrender themselves to the system and the order of operations like you can with Dave Ramsey’s Baby Steps. You have to actually think and have a plan and specific goals about where you want it to go afterwards.
So I think that’s really powerful approach there. But I also think it’s really telling that I have yet to really come across folks who broadly disagree with the, “Hey, get your financial house in order. Pay off all your high-interest rate debt, build an emergency reserve, and then invest.” Don’t skip ahead to the try to make a bajillion dollars overnight with some crazy investment thing here. It’s get the foundation house set before making those big investments because those reserves and that financial foundations is what you’re going to lean back on over the course of decades as you build wealth.

Mindy:
Yes, and I have come across people who disagree with that, but their argument doesn’t hold water and you can quickly ascertain that they don’t know what they’re talking about. So, everybody that I know that I respect as a financial person is saying the exact same thing. You have to have a firm foundation, otherwise everything else is going to go to garbage, let’s use that word.

Scott:
There you go.

Mindy:
All right, Scott, should we get out of here?

Scott:
Let’s do it.

Mindy:
That wraps up this episode of the BiggerPockets Money Podcast. He is Scott Trench, and I am Mindy Jensen saying, so long, King Kong.

Scott:
If you enjoyed today’s episode, please give us a five-star review on Spotify or Apple. And if you’re looking for even more money content, feel free to visit our YouTube channel at youtube.com/biggerpocketsmoney.

Mindy:
BiggerPockets Money was created by Mindy Jensen and Scott Trench, produced by Kaylin Bennett, editing by Exodus Media, copywriting by Nate Weintraub. Lastly, a big thank you to the BiggerPockets team for making the show possible.