Prepaid Expenses: Financial Strategies for Future Savings

Derek learns that the best account for prepaid expenses depends on the specific goal and timeline.

### Managing Prepaid Expenses in the Financial Order of Operations
* 💰  Step 8 of the Financial Order of Operations (FOO) involves **prepaying future expenses** once you've established your emergency fund and are **saving 25% for your future self**.
* 📚  Common examples of prepaid future expenses include **saving for college**, a **future wedding**, a **big trip**, or a **home renovation**.
* 🏦  Where you keep this money depends on the specific goal and timeline: use a **529 plan** for college savings, a **high-yield savings account** for short-term expenses, and a **brokerage account** for longer-term goals like buying a rental property.
* 💡  This step allows you to think about **"abundance goals"** and spend money differently, without sacrificing your **financial foundation**.
* 💼  Brian recommends having "**a little powder money**" for future opportunities, but emphasizes that this is in addition to saving and investing in **steps 1 through 7 of the FOO**.
* 🏥  If you're considering using an HSA for prepaid expenses, it's likely you've already **maxed out your contributions** at step 5 of the FOO.
* 📘  For more detailed examples and guidance on step 8, you can refer to resources like **"The Millionaire Next Door"** or **"The Millionaire Mission."**
* 💸  This step represents a **significant milestone in your financial journey**, allowing you to **enjoy the fruits of your labor** while continuing to **build wealth for the future**.

[Music] Derek's question is up next. He says, For prepaid expenses, so that step in the financial order of operations, where do you keep that money? Is it also in an HSA, or can you keep it in a brokerage? Where would, where should he think about keeping that money? And can you maybe expound on what the prepaid expenses step is? Well, it depends, right? So, uh, Brian, can you hold the thing up for, we have this great resource. It's a nine-step tried and true process to show you what to do with your next dollar. If you want your free Cofe, you can go to moneyguy.com/resources and grab it. What Derek is referring to is Step eight, prepaid future expenses. This is once you've worked through the foo and you're saving 25% for your future self, and you're building towards Financial Independence, and you still have discretionary cash flow you can do something with. There are opportunities for begin prepaying future expenses is that you may incur. So, there are some common examples, uh, One prepaid

future expense that a lot of parents are going to tackle is how do I save for college, how do I pay for a future wedding, what's a big trip that I want to do, there's a big home renovation I've been planning on doing, and so the answer to your question is like where do I hold that money is going to depend on what is that prepaid future expense. If you're saving for college, 529 is a great example. If you're saving for a home renovation that's going to likely take place in the next two to three years, then cash is probably going to be your best bet in like a high-yield savings account. If you're saving for the ability to one day buy like a rental property or a second home or a vacation home, but it might be five, seven, eight, ten years down the road, then that may take place in a brokerage account. So what you have to back into is what is the goal itself, what's the best funding mechanism to achieve that goal, and then what's the

timeline because the timeline will decide when and where I put those dollars to work. Yeah, I mean, the whole purpose, remember Financial order of operations, is what to do with your next dollar. It's kind of helping you streamline the incremental decision-making you have to be a financial mutant and maximize every dollar that comes into your army of dollar bills. And that's the problem that I think a lot of people struggle with. There's not one account. It's exactly what Bose said. You have to kind of think about this next dollar, what I'm going to use it for, you know, because abundance goals, that prepaid expenses also. I give it the good time Bobby, Uncle Bobby name of abundance goals. This is giving you permission. You've done the financial Foundation stuff of steps one through S. This is supposed to be now, holy cow, congratulations, you get to think about money and spend money, consume money a little differently. Yes, now maybe we're going to help the kids. That's the 529s B was talking about, but

maybe now is when you got the financial foundation. Let's go ahead and see if we can be a real estate investor and fire up those types of opportunities. Or maybe this is when you buy the nicer car. You've built up, you have enough after-tax money that you can just pay cash. You've always wanted that nicer car. This is your time to do it because you have not sacrificed your future self to get to this point. You didn't fake it until you made it. You actually built up the assets first that you're at a threshold of now choosing the next thing. So depending upon how you answer what that next thing is, is how the account will actually be structured. I love it and kudos to you for being on step eight. What an awesome journey. Didn't say how old he was, but what an awesome thing to be. Now you mentioned can it be in an HSA. Potentially, but odds are if you're on step eight, you've already maxed out your HSA. That was a

step five thing, and you can't put more in than what you're allowed to do on an annual basis, so it's probably not going to be in the HSA account. Just want to close the loop on that one. Yeah, and by the way, we cover, I'd be a bad business person and a bad author millionaire Mission. I actually give a lot of examples on step eight in there if you really want to kind of even what I do. And I, and by the way, I've even boosted up my cash, you know, because I like having a little powder money for next time there's chaos opport. I'll have some money, but I didn't do that. I didn't build up all this cash and sit on the sidelines waiting. This is an addition to what I'm saving and investing in steps 1 through 7.

Where Should You Keep the Money for Prepaid Future Expenses?

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Prepaid expenses are addressed in Step eight of the financial order of operations, focusing on saving for future costs.

The best place to hold the money for these expenses depends on the specific goal, such as a 529 plan for college savings or a high-yield savings account for a home renovation.

For long-term goals like a rental property or vacation home, a brokerage account may be the most suitable option.

A financial timeline is crucial for deciding how to allocate money effectively.

The goal is to streamline decision-making and maximize the use of each dollar.

Once the financial foundation is established, individuals can shift their focus to abundance goals and using money for things like helping children through 529 plans.

Building Wealth and Making Strategic Choices

Now is the time to consider real estate investing or buying that nicer car with your after-tax money.

You've built up your assets first, allowing you to choose your next move without sacrificing your future.

If you're on step eight of your financial journey, you may have already maxed out your HSA.

Step five emphasizes not exceeding annual limits for contributions, making it unlikely for funds to be in the HSA account.

The author shares personal examples of boosting cash reserves for future opportunities, highlighting the importance of having extra money during chaotic times.

This cash accumulation is presented as an addition to the savings and investments made in the previous steps.