The Art of Manliness - #481： Building Financial Independence Beyond the Stock Market

00:00:00.000 Brett McKay here and welcome to another edition of the Art of Manliness podcast.

00:00:18.760 Financial independence is a goal for a lot of folks, but what does it take to get there?

00:00:23.200 My guest day explores that question on his website, Financial Samurai. His name is Sam

00:00:27.160 Dogen, and before writing about money online, he worked in finance. We began our conversation

00:00:31.000 discussing how his career in equities shaped his personal finance philosophy and made him leery

00:00:35.320 of putting too much wealth in the stock market. Sam shares why he recommends putting a lower

00:00:39.040 percentage of your money in stocks than is often recommended in mainstream financial advice,

00:00:42.960 how that percentage should shift as you get older, and alternative ways to invest, build your wealth,

00:00:47.440 and create multiple streams of income that will give you more control over your fortunes.

00:00:50.960 Sam then shares what it means to be financially independent and some of the blind spots he

00:00:54.680 thinks exists in the fire or financial independence retire early movement. We end our conversation

00:01:00.160 talking about how to plan your financial life for the future, especially concerning what the

00:01:03.920 changing world would be like for your kids. After the show's over, check out our show notes at

00:01:07.400 aom.is slash financial samurai. Sam Dogen, welcome to the show.

00:01:21.020 Sam Dogen, thank you very much. Glad to be here.

00:01:23.700 So you run a website, one of the blogs I subscribe to in my RSS feed, Financial Samurai. I'm not sure

00:01:31.740 exactly how I stumbled upon your website, but I've been a longtime reader. What I like about it,

00:01:37.980 it's different from a lot of the other personal finance blogs out there. We'll talk about what

00:01:42.360 makes your sort of approach different. But before we get there, let's talk about your background and

00:01:46.620 how it influenced your philosophy towards personal finance.

00:01:49.760 Well, thanks for being a reader on my site for so long. I've been a reader and listener of your

00:01:53.420 site and podcast for a while as well, and I've watched it grow so tremendously. So congratulations

00:01:58.340 there, Brett.

00:01:59.140 Well, thank you.

00:01:59.940 My background is pretty simple, I guess. My parents were in the US Foreign Service. I grew up overseas in

00:02:07.180 Asia and in Zambia for 13 years before coming to the United States for college. And they were always 0.99

00:02:12.640 really frugal. Whenever I'd go out to eat, my parents would admonish me for ordering anything

00:02:18.660 but water. And so I knew kind of their frugal ways since I was a kid. And so I decided to go to public

00:02:25.460 school, the College of William & Mary, which is only about $2,800 a year at the time. And then I landed

00:02:31.740 my dream job in finance. And so from 1999 to 2012, I worked in the equities department of a couple

00:02:39.780 major Wall Street firms. And then in 2009, during the financial crisis, I decided to start Financial

00:02:46.180 Samurai as a cathartic way to deal with the financial crisis. So I was thinking, well, instead

00:02:53.820 of smoking or drinking, maybe it'd be healthier to write because I love to write and I love to connect

00:02:58.420 and hear other people's perspectives. So I started Samurai in 2009. And by 2011, it was actually making

00:03:04.960 somewhat of a livable income stream in San Francisco. And so in 2012, I negotiated a

00:03:10.420 severance after 11 years with one firm. And I decided to do this full-time and be free.

00:03:15.680 So you mentioned you started this in 2009, right? When the financial crisis hit. Were you affected

00:03:21.540 personally by that? Was your bottom line, your net worth adversely affected?

00:03:25.680 Absolutely. I was crushed. So I started in 1999, right? 10 years saving, investing really,

00:03:32.500 really diligently. I remember the first month I started working, I'd get into the office at 5.30

00:03:37.960 a.m. And then I wouldn't leave until 7.30, 8 p.m. all the time. And I knew after about a month,

00:03:43.300 I couldn't last. So I was basically saving and investing every single dollar I could afford.

00:03:49.740 I lived in a studio with another friend for a couple of years because I knew I couldn't last in

00:03:54.120 this industry. So I actually lasted about eight years longer than I thought I would to 2012.

00:03:59.680 So during the financial crisis, my net worth got crushed by, I would say, maybe 40%

00:04:05.000 at the bottom in a matter of about six months that took 10 years to accumulate.

00:04:10.900 And so before this time, were you following sort of like a traditional mainstream approach to personal

00:04:15.600 finances? Like where you said, okay, I'm going to set aside this amount of money all in stocks

00:04:19.840 because I'm young, because I got a long time for that to grow. And even if there are setbacks,

00:04:24.880 I got time to make up. Were you following that sort of thing? And did your philosophy change after

00:04:30.180 that?

00:04:30.480 So because I worked in finance and equities specifically, I decided to basically invest in

00:04:38.700 almost everything but equities. So my investment of choice was real estate once I started accumulating

00:04:46.680 a large enough nut. And so I diversified away from the stock market after maxing out my 401k and

00:04:53.420 receiving company stock and stuff like that, but investing basically in San Francisco real estate

00:04:58.620 and Lake Tahoe real estate. So I figured my career was already leveraged to real estate,

00:05:04.220 my bonus, my pay, my promotion. So I didn't want to have more in equities. And it was interesting

00:05:10.560 because when I started in 1999, it was bull market. It was a dot-com mania. And then by 2000,

00:05:16.740 dot-com bubble burst. And then by 2001, a lot of paper millionaires lost a lot of money and a lot

00:05:22.560 of people got fired in the industry. And then so that was a wake-up call. And then we had good times

00:05:28.380 all the way up until 2008. And then things blew up again. So my history in the equities department

00:05:38.100 and in investing hasn't been quite a glorious one, even though the stock market is close to record highs

00:05:44.680 now. It's been quite treacherous, actually.

00:05:47.640 So like I said earlier, one of the reasons I enjoy reading the articles on your website is because

00:05:51.380 your philosophy towards personal finance seems to go slightly against what you typically see from

00:05:56.660 accepted personal financial advice. I mean, so how would you say your philosophy differs?

00:06:02.520 I mean, so start off, what do you think is the overarching philosophy that you have towards money?

00:06:06.820 And how does that differ from sort of mainstream advice?

00:06:09.180 I strongly believe that we all have the ability and deserve to be rich. I really come with that

00:06:17.460 mindset that we all deserve to be extraordinarily wealthy if we want to be. Now, obviously, there's

00:06:23.660 going to be more challenges. We're going to face more hurdles than some other people. Some people

00:06:29.040 have huge headstarts with their parents, with their jobs or whatever. But thanks to the internet,

00:06:34.060 we can learn other people's stories, we can learn other people's archetypes, and follow along and

00:06:40.460 learn from others so we can ourselves get better. I have some fundamental thoughts about personal

00:06:46.180 finance. And that is, one, if the amount of money you're saving each month doesn't hurt, you're not saving

00:06:52.060 enough. And then two, I think it's important that everybody forecasts their misery. And that ties

00:06:58.840 together with fundamental number one. Too many people, I think, don't forecast their future.

00:07:07.260 You know, they start a job and they think, wow, this is so fun. You know, my colleagues are awesome.

00:07:11.680 My boss is great. But as we all know that life happens, right? Life happens at our job, things get

00:07:17.920 boring, people get fired, exogenous variables happen all the time. And it's important to look ahead five,

00:07:24.460 10 years from now, and constantly be thinking, what are some of the things that might trip

00:07:28.820 you up? What are some things, good and bad, that might help or hurt you along your path to financial

00:07:35.940 freedom? So when you start practicing thinking ahead, often, whether it's in your career, your money,

00:07:42.500 your business, you start internalizing this different way of thinking, where you're just not

00:07:47.840 some zombie sitting there in the present, thinking about what you got, while you're thinking ahead,

00:07:54.160 and hopefully making rational decisions to get to where you want to go.

00:07:58.760 All right. So it sounds like, yeah, number two is like, think worst case scenario. Like,

00:08:02.040 what's your backup plan if things don't go right?

00:08:04.880 Always think about blue sky scenario, realistic scenario, and worst case scenario. And I think,

00:08:10.580 you know, it's going to be optimistic. But if we have a default assumption of everything going out

00:08:15.560 great, that's probably really dangerous for the most of us.

00:08:19.120 And I guess one of those default assumptions that you see frequently in the personal finance world is

00:08:23.400 like, going back to equities. It's like, whenever you read these personal finance books, they always

00:08:27.540 assume like 8% return on investment. That might not necessarily be the case for some people.

00:08:32.800 Oh, no. There's like huge sequence of risk issues. If you look back at 2000, you saw losses in 2000

00:08:40.260 of around 12%. And then 2001, you saw another down year. And then in 2002, you saw another down

00:08:46.040 year. So three years in a row where you ended up losing about 42 to 45% of your wealth. So if you

00:08:52.520 actually had a significant amount of wealth, then you'd be in trouble if you wanted to retire around

00:08:58.040 then. And then of course, we had another downturn in 2009, right?

00:09:04.040 Right. And then another thing people don't think about too, is like, if you lose, the other sort

00:09:08.820 of mainstream personal finance advice is like, well, if you lose in the stock, you have time to recoup

00:09:13.740 that. But they often overlook is that sometimes it takes longer for you to recoup those losses than

00:09:19.740 you think it would take. Oh, yeah. I mean, there's a, so if you lose 50%, you've got to make 100% just

00:09:27.580 to get back to even. But during that time back to 100%, you're losing time. And so the older you are,

00:09:33.620 naturally, the more you're going to appreciate your time because you have less of it.

00:09:39.160 And I think a lot of people maybe in their 20s or in their 30s will underappreciate time and think,

00:09:45.960 you know, they're invincible and they have all the time in the world to get this back.

00:09:49.860 But you will soon realize maybe when you hit 40 or plus, and if you have a family to raise and people

00:09:55.960 to take care of that, you really don't want to waste so much time trying to get back to even anymore.

00:10:02.640 So at some point, you've got to figure out how much is enough for you. And you've got to dial

00:10:07.700 back your risk tolerance and say, you know what, maybe four to 5% returns a year on my portfolio or

00:10:13.480 on my overall net worth is good enough. Maybe it's not worth the risk of trying to make a 10% plus

00:10:18.740 return, because it really doesn't change the quality of your life. And it could actually

00:10:23.160 significantly impact negatively impact your life by having you have to work more or stress more

00:10:29.300 just for money. So yeah, that kind of goes to one way you differ from personal finance,

00:10:34.300 like mainstream personal finance stuff. So the article of faith is that, you know, the younger

00:10:37.620 you are, the more money you should have in equities. I think it's like 90% is something like that,

00:10:43.240 the number you see thrown around. But you personally don't do that. You said that you,

00:10:46.440 you know, because you worked in equities, most of your money went out of equities and did things

00:10:50.460 like real estate or whatever. So it seems like it's a very conservative approach.

00:10:54.560 How do you think that conservative approach helps you win in the long run?

00:10:58.580 I don't know if it's conservative. I think it's more rational. I think people who are putting 80 to

00:11:04.340 90% of their net worth in the stock market, I think might need to do some soul searching here and look

00:11:11.780 at their net worth distribution and look at other asset classes like real estate, like fixed income,

00:11:18.260 like your own business equity, because life is quite complicated. 80, 90%, no way. I mean,

00:11:24.220 yeah, maybe when you're in your 20s and you don't have a family and you have, you're a vagabond or

00:11:29.600 you just want to move to job every two to three years. But in my view, wealth is more about real

00:11:37.100 assets, right? So assets that you can derive utility from, that you can live in, that you can

00:11:44.040 generate rental income. Stocks, you can't really derive any utility. You need actually a purpose

00:11:50.380 for your stock investments. And the issue with stocks, I mean, don't get me wrong, I've got about

00:11:57.100 25% of my net worth in stocks. But the issue with stocks is that it goes up kind of slowly and then

00:12:03.720 it just crashes very quickly due to panic. And if you don't have a discipline for what you are investing

00:12:11.680 for, you're kind of throwing money into a vehicle that is shown to do well over time.

00:12:17.380 But there's really no utility. And that is something where I like to invest in something

00:12:22.280 where it could potentially go up, appreciate in value, and provide utility. You know, two things,

00:12:28.860 not just, oh, it could go up and make me richer. I mean, who cares?

00:12:32.820 Well, it seems also too, like by focusing on things like real estate or your business,

00:12:37.720 or even just acquiring skills so you can ask for and negotiate for a raise,

00:12:42.300 like those are things that are in your control. Like the stock market,

00:12:44.720 like you can't do anything about that, really.

00:12:47.720 Yeah, you're a minority investor that is subject to the whims of, you know, the government,

00:12:54.000 the Federal Reserve, fraud, whatever. And, you know, I think, you know, the stock market is great

00:13:00.080 for those who want to, you know, give up control and just invest passively. So at the same time,

00:13:06.060 you know, if you believe in yourself, if you want to be active and try to build wealth,

00:13:10.460 I think you can do a little bit better job through a business or through real estate,

00:13:15.200 frankly. You know, there's obviously some great stocks that I like, because I really believe in

00:13:19.940 the business people and the product, you know, Amazon, Tesla, you know, these are amazing products.

00:13:26.340 And I would be willing to bet on these people. So one of the interesting things that I noticed

00:13:30.600 from my 20s to now my 40s, is that not only do I invest in public equities based on the fundamentals,

00:13:37.040 but I really try to invest in the people. Like the people who I see are business visionaries who

00:13:44.000 can get the job done, and who can think ahead always three to five years and anticipate.

00:13:51.060 Because, you know, Financial Samurai, even though it's just a personal finance side,

00:13:55.720 it's our lifestyle business. And I like to think ahead as well to see if I can grow that,

00:14:00.540 because it's fun.

00:14:01.420 So let's talk about like, you know, an investment strategy, we'll call it that,

00:14:05.160 a wealth strategy for someone who's in their, say, 30s. So you mentioned someone that they're

00:14:09.020 in their 20s, no family, no strings attached, you know, putting most of your money, 90% of your

00:14:14.400 wealth in stocks, probably not a bad idea. But let's say you're in your 30s, family, you have a

00:14:21.960 house. So there's a lot more at stake if you, you know, your net worth takes a beating. So what does

00:14:27.820 like a strategy look like for that person? I know, you know, specifics, it's going to vary

00:14:32.180 from person to person. But sort of generally, what does that look like for you?

00:14:36.040 It's going to be dependent on everybody's individual earnings powers and ability. But

00:14:40.120 if you're in your 30s, and you have a family, you should be at least neutral real estate by owning

00:14:46.980 your primary residence. So neutral real estate is just floating up and down with the water and the

00:14:53.440 tides. You're short the real estate market if you're renting, right? You are a price taker,

00:15:00.320 you're paying rent, and you're getting no equity. So you're short the market. And you're only long

00:15:05.500 real estate if you are long, or if you own more than one property. And this is really important

00:15:12.080 to for people to think about. If you short the stock market over a 20 year period, you will probably

00:15:18.600 lose a lot of money. And so for those who are anti real estate, renting for 20 years is also quite

00:15:27.260 similar to shorting the stock market over 20 year period due to inflation, and the normal appreciation

00:15:33.300 of assets due to labor, and so forth. So I think, you know, someone's in their 30s with a family and so

00:15:40.740 forth like that, you should probably have something around 30% to 40% in equities, 30 to 40% in real

00:15:49.980 estate. So you're at least neutral real estate, and the rest in more stable, lower risk investments,

00:15:57.220 like fixed income and CDs. I think you should always have 5 to 10% of your net worth, at least

00:16:03.380 in low risk, stable income securities. So okay, real estate, you're big on that. What if you like

00:16:10.380 you don't want to be a land, a landlord, right? Like, I mean, I've, I have friends who that's what

00:16:15.100 they do. And it sounds like a nightmare sometimes, because the tenants are just terrible. They just

00:16:18.940 trash it up. They're always having to do repairs. So that's something else to consider too, if you

00:16:23.420 want, you know, if you're thinking about doing real estate, but are there other ways to invest

00:16:26.580 in real estate without having to do that? Yeah, you can just invest in a REIT and be a

00:16:32.640 commercial property landlord that way. There are many different types of REITs. You can invest in

00:16:37.380 real estate crowdfunding, which is where you invest, you know, a thousand to 10,000 at least in these

00:16:43.620 commercial properties across the country. And again, when you're talking about being a landlord,

00:16:48.940 you're talking about going long real estate. It's going beyond your primary residence.

00:16:55.580 So once at a time, own your primary residence, if you know, you're going to be there for five,

00:17:00.340 10 plus years. And I found that stability, stability does wealth pretty good. You know,

00:17:06.360 no matter what people say about job hopping every two to three years or whatever, just finding your

00:17:11.860 community, you know, find, find yourself in your twenties or whatever. But after about 10 years

00:17:16.100 of looking, uh, you know, I think you should probably find or realize that there's a place

00:17:21.480 in the world where you want to settle down and establish some roots. And once you establish some

00:17:26.160 roots, you see a lot of positive network effects from your relationships, your network, uh, the other

00:17:31.080 opportunities around that city and your investments in real estate and the stock market. You can, you can

00:17:36.460 live anywhere, but there's positive network effects. If you can stay in one place for a certain

00:17:41.980 period of time. Right. And that goes counter to a lot of, what a lot of young people, they think

00:17:45.620 they got to constantly move, job hop, job hop, move to the city. It might be good to like, just settle

00:17:51.500 in a suburb where, you know, you, you're happy, right? Hey, you know, sometimes it takes longer to

00:17:58.080 find yourself. I thought, you know, I was really lucky to find a job in finance and I would have gone

00:18:03.560 anywhere in the country and in the world to get that job. And so I just kind of went where the job

00:18:08.780 took me, but eventually I wanted to settle down. And when I found San Francisco in 2001, I was like,

00:18:12.700 you know what? This place is cheaper than Manhattan. Uh, it's more diverse. The weather is great, good

00:18:18.760 outdoor life. And it was closer to Hawaii where my dad's side of the family is from and Taiwan where my

00:18:23.480 mom's side of the family is from. So I figured, Hey, why not set up shop? And so I've been here ever

00:18:28.820 since. And, you know, I think I'm going to be moving soon to Hawaii, but it's been a good run. And if you can

00:18:35.700 identify something quicker where you're going to be happy living, I think, uh, I think that's a great

00:18:41.200 thing. So you mentioned that breakdown for someone in their thirties with a family, like 20 to 30 in

00:18:46.180 stocks, 30 to 40 in real estate, and then some of the rest and sort of very stable things like CDs

00:18:51.480 or fixed income type things. Uh, does that change as you get into your forties or fifties?

00:18:57.240 It definitely changes. And there's just so many different permutations that it's hard for me to give

00:19:03.420 some exact recommendation. Sure. But I do believe that everybody should figure out how to build their

00:19:11.360 own long-term growth equity. So in other words, starting a business and you know, a lot of people

00:19:19.180 are like, well, I don't know how to start a business or whatever. Neither did I. But if you look at the

00:19:24.120 world's wealthiest people and their asset allocation breakdown, the wealthier they are, the larger

00:19:30.240 percentage of the net worth comes from equity in their business. And it doesn't matter what kind

00:19:36.320 of business it is. It's just equity in their business. Because when you have a business,

00:19:40.600 you can not only earn money from that business, you can hire your friends and family for that business.

00:19:46.720 And you can sell your business for multiples of revenue or earnings. Whereas if you have a job

00:19:52.180 only, you can only sell your time. And so you don't want to limit yourself. The way I look at my online

00:19:58.860 business is that I run it because I enjoy writing and I enjoy connecting with other people. But I also

00:20:05.860 run it because I have a son now. And I know that life is going to be hard for him as he gets older

00:20:12.200 because of globalization, because of the speed at which information travels, and because of the rigors

00:20:19.580 of trying to get into a good school, and so forth. And so my motivation now is to keep the business

00:20:26.460 running long enough until my son tells me, you know, I want to have nothing to do with learning

00:20:30.520 about online marketing or writing or anything like that. Because I think I think world is going to get

00:20:39.660 much, much tougher. And it's going to get much more bifurcated to those who have. And then those who

00:20:46.260 have not prepared. We're going to take a quick break for your word from our sponsors.

00:20:51.180 And now back to the show. So speaking of a business, and that necessarily doesn't mean

00:20:55.860 you have to completely quit your job to start a business. I mean, you're a big proponent of

00:20:59.820 having a side hustle where just sort of a side stream of income that supplements your

00:21:03.520 income from your career. Oh, absolutely. You don't want to rely just on your job income. There's

00:21:10.920 no way in hell if I was back in my 20s, 30s, that I would only have one job. You know, we know that

00:21:17.600 companies aren't as loyal as they once were. And so therefore, you have a higher risk of getting

00:21:22.980 fired at any given moment in time. And the great thing is, is that the internet has allowed you

00:21:28.960 to develop so many side hustles, right? From Upwork to Craigslist to TaskRabbit to, you know,

00:21:35.380 ride share driving. These are side hustles. And then there's obviously the businesses where you

00:21:41.500 can start your own website to sell stuff, or you can write stuff, you can build your brand. I mean,

00:21:45.940 it's just endless. And it's just so easy to start now. You know, you can just start this podcast,

00:21:51.120 get enough listeners, you can get advertising dollars. It's just an endless variety of ways

00:21:56.300 to make money. And I'm so excited for people who are growing up in this era right now who are

00:22:02.980 younger, who can take advantage. And then also, it can turn into a full-time gig eventually,

00:22:08.180 possibly. Oh, yeah. Definitely possibly, right? The best is if you're working, let's say you're

00:22:13.880 working from 7.30 a.m. to 6 p.m. You can either work on your side business from 5 a.m. to 6.30 or 7

00:22:21.720 a.m. Or, you know, after you get home, you do that for two, three hours. You tinker with it. You toy

00:22:26.480 with it. There's no downside at all. There's no downside at all. The only downside is if you ask your

00:22:32.540 company, hey, can I do this? And they say no, and you do it anyway. And they find out and then

00:22:36.540 they screw you or something. So you got to be strategic about that. But I worked on Financial

00:22:41.620 Samurai off hours for two to three hours a day for two years before it started making a livable

00:22:46.260 income stream. And I remember in Santorini, Greece, I was just hiking my way up the hill and I wanted to

00:22:53.140 get a $10 beer. And I got an email with my iPhone. There's Wi-Fi at the bar. This is 2011.

00:22:59.920 And I was like, hey, Sam, I'd like to advertise on your website. If you put up this advertiser,

00:23:05.500 I'll pay you $1,200. And I was like, wow, $1,200? Really? I was like, okay, sign me up.

00:23:11.100 And so I put up that code in about 25 minutes. And then he PayPal'd me the money instantly.

00:23:17.220 And I was like, oh, time for another beer. And that was the moment where I thought,

00:23:20.660 hey, there's actually life after finance. This is pretty cool.

00:23:22.920 Okay. So speaking of things we can do to control and have more control over our wealth,

00:23:29.120 starting a side hustle, but also your job. For some people, they might not be able to quit their

00:23:34.420 job right away. But one thing they have control over is negotiating a higher salary. A lot of people

00:23:40.240 are afraid to take that leap. Yeah, I don't know why. Maybe it's a

00:23:44.980 self-confidence issue. In the first two years, I was learning, right? Learning what the hell am I

00:23:50.780 doing? I was a cost center. But after a while, you kind of get the hang of what it is you need

00:23:55.180 to do to provide value at your firm. So everybody really needs to understand that the reason why

00:24:00.620 you have a job is because you create more value to the firm than your total compensation and

00:24:05.920 benefits. If you didn't, you would be fired. And so, so long as people know that, they need to have

00:24:12.080 confidence in themselves that they're providing more value. And I do recommend that everybody,

00:24:16.320 everybody every, at most, every two years have a heart-to-heart with their manager and say,

00:24:21.480 hey, these are the things that I provided to you. I would like a raise. If you go on the open market,

00:24:27.660 you could probably immediately get a 25% raise easily. And so you have to keep your employer

00:24:32.320 honest at least every other year. And preferably you can do so every year during a year-end review.

00:24:37.160 That is if you're not suffering from Dunning-Kruger and thinking you're providing more value than you

00:24:42.640 really are. Yeah, I imagine there's a lot of people like that. So I guess one thing is like,

00:24:45.780 keep a record of the things you've done so that you can present that to your employer when it's

00:24:49.380 for sure. Your manager doesn't remember what you, what great things you did in the first and second

00:24:53.820 quarter. So it's up to you to manage up, manage your manager and highlight with confidence, but with

00:25:01.260 respect. These are the things that I've done for the firm to make it better. And this is why I deserve

00:25:06.860 to be on this track. You need to make sure that your manager is on top of your career progression.

00:25:12.280 So talking about financial strategies and trying to get the most bang for your buck and getting

00:25:16.940 to create the most wealth and most income for you. But I mean, for people who have debt,

00:25:22.220 I guess one of the best things they can do is pay off that debt because that just frees up so much

00:25:26.220 money for themselves.

00:25:27.880 Yeah. So debt is interesting. Whether you have student loan debt, mortgage debt,

00:25:32.780 you better not have credit card debt because not even the great Warren Buffett has been able to

00:25:36.360 return an annualized return equal to the average credit card interest rate. So my formula for

00:25:43.260 paying down debt and investing is called FSDAIR, D-A-I-R. Basically, what you want to do

00:25:50.400 is take your debt interest rate, let's say it's 4%. So you would essentially use 40%. So you just

00:26:00.960 multiply it by 10. You get 40% of your cash flow to pay down debt and then 60% of your cash flow to

00:26:07.260 invest. So you're always paying down debt or investing. If your debt interest rate, let's say

00:26:12.480 it's only 2.5%. So my mortgage is only 2.5%. I've only been using about 25% of my cash flow to pay down

00:26:20.280 that debt. And I've been investing 75% of my cash flow to invest. Now, I limit it up to 10%. So if

00:26:26.960 your debt interest rate is 10% or higher, then you should spend all your free cash flow to pay down

00:26:33.360 that debt because 10% is ridiculous because the debt interest rate needs to be compared to the

00:26:39.380 risk-free rate of return. So what is that risk-free rate where you can earn money and not have to worry

00:26:44.140 about losing money? And that risk-free rate of return is either a one-year treasury bill or a 10-year

00:26:49.180 treasury bill or your money market rate, right? So right now, you can get a money market rate

00:26:53.220 interest rate of 2.5%. And you can get 10-year treasury bond is only about 2.7% right now.

00:27:00.560 So it's not that great. But the point is, is that if you pay 10% or higher in debt interest rate,

00:27:05.900 you're paying like a 7.5% plus premium on a risk-free rate of return. That is like robbery.

00:27:11.980 So that's why credit cards are so rich. And that's why you see so many websites promote credit cards.

00:27:17.280 They make so much money off people who don't pay off their debt every single month.

00:27:20.800 You got to crush that credit card debt. You should never have credit card debt. And then

00:27:24.980 you should have a disciplined formula using FSDAIR to pay down debt and invest in a proper ratio.

00:27:32.820 Gotcha. So let's talk about a goal that a lot of young people have. And there's a lot of talk

00:27:37.560 about this lately in the news and the media. It's this FIRE movement. It's like, what's it?

00:27:43.360 Financial independence, retire early. Is that what that stands for? Is that what that...

00:27:47.560 All right. I mean, there's a lot of talk about it. What does financial independence look like

00:27:52.820 for you? Because you've written about that too on Financial Samurai.

00:27:55.920 Yeah. I mean, my tagline is achieving financial freedom sooner rather than later since 2009.

00:28:01.860 And so financial independence to me is simply having enough gross passive income to cover your best life

00:28:11.740 living expenses. It's that simple. So you need to invest and save beyond your 401k and your IRA and so

00:28:21.260 forth. You need to build a large enough after-tax investment account that spits off enough gross

00:28:26.460 income so you don't have to work. Now, where the lines get shady or gray is that a lot of people

00:28:33.540 who are proponents of the FIRE movement don't have that concept. Their passive income does not cover

00:28:40.500 their life expenses. What they're doing is they're talking about financial independence retiring early.

00:28:47.120 Meanwhile, they're hustling like hell on their blog or on side hustles to try to make a living

00:28:52.780 in a non-traditional way. So it's important for listeners to really delineate between what is

00:29:01.660 true FIRE. And you know what? Everybody has their own definition, right? But the reality is we've come

00:29:07.300 through, we've just gone through a nine-year bull market. So it's really easy to understand why so

00:29:12.880 many people are feeling confident about their finances. But I just want people to be a little bit

00:29:19.240 more reserved to understand, hey, what's really behind the movement? Is the person who is expounding

00:29:27.720 FIRE, does he or she have enough passive income to cover his or her life expenses? Or is he or she

00:29:34.760 working 70 hours a week as a freelancer and saying they're financially independent, but they're really

00:29:40.080 just changing their jobs from full-time work to freelancing?

00:29:44.200 Gotcha. And then like, so you talk about it's passive income. Like how do you get that sort

00:29:50.720 of passive income? I guess that's just real estate. And I mean, are you investing in stocks

00:29:54.640 that pay dividends? I mean, what is that? How do you get that passive income where you're making

00:29:57.540 enough to cover your basic life expenses?

00:30:01.040 Yeah. So you want to invest in things that spit out income. So the value of anything is based on its

00:30:09.680 current earnings and future earnings. So passive income investments, such as certificates of

00:30:16.420 deposit, fixed income and bonds, physical real estate, peer-to-peer lending, dividend investing,

00:30:25.040 private equity investing, creating your own products online. For example, I have a book that I make about

00:30:30.480 $4,000 a month, and it's about how to negotiate a severance. What else is there? Real estate crowd

00:30:35.900 sourcing. That's definitely one of them. So there's definitely multiple ways you can make passive

00:30:41.860 income. And the passivity, or whatever the word is, is different. Some like owning physical real

00:30:50.780 estate is going to be less passive than just owning a dividend stock, for example. But you basically want

00:30:56.360 to build a portfolio of different passive income investments.

00:30:58.960 And how much do you need to sock away so you can get that passive revenue, that passive income?

00:31:06.560 Because I think, is it more than what people think they might need? Like a lot more?

00:31:11.340 So the math is pretty simple. Let's say you can live off $10,000 a year. So you get $10,000 divided by

00:31:18.120 your expected return, realistic return on your passive income. So let's say that's 4%.

00:31:23.960 4%. You would need $250,000 in capital to generate $10,000 a year in passive income at a 4% rate of

00:31:32.660 return. So let's say in San Francisco, you have a family to support, and you have a house and all

00:31:38.700 that stuff, and you want $200,000 a year in passive income. And you take a conservative rate of return of

00:31:46.180 about 4%. Then you need about $5 million. And so this is just passive after-tax income.

00:31:55.060 And so you can supplement that by doing freelance work, or you can have more active income, such as

00:32:04.600 you can run a podcast, or you can run a website. There's all sorts of things you can do once you

00:32:09.260 no longer have a full-time job. But it's important to just realize that it's the after-tax investments

00:32:16.300 that are going to create that gross passive income for you.

00:32:20.560 Gotcha. And so you mentioned, did you say the example, like $10,000 a year? Are there some

00:32:25.380 people who live on $10,000 a year? I was just using it as just math.

00:32:28.540 Oh, just an example. Okay.

00:32:29.360 So if we say $100,000 a year at a 4% rate of return, you need $2.5 million in capital.

00:32:35.720 That makes sense. Okay. But I mean, I guess part of the FIRE movement too, and you said

00:32:39.060 part of increasing your net worth is also decreasing the amount of money you spend so you have more

00:32:46.280 money, right? That's another component besides making more money. Even though making more

00:32:50.120 money, that's an important part, but spending less money is also an important component of this.

00:32:55.400 Yeah. I would say a good ratio would be to focus 80% of your time making more and 20% of your

00:33:04.020 time having a reasonable budget. Don't be stupid with your spending. The thing is the FIRE movement 1.00

00:33:11.600 has really been pushed by people who live in low-cost areas of the country, whether they live

00:33:16.120 in the Midwest or the South, the heartland of America. But as we know, especially through the

00:33:21.220 presidential election last time, half the population lives in the expensive coastal cities

00:33:26.440 like San Francisco, New York, Boston, Washington, DC, Seattle, Los Angeles, and so forth. And so,

00:33:33.600 you know, what might be good for one person to live off $35,000 a year in Alabama is maybe not

00:33:41.720 going to be that feasible for someone who's living in New York City or Manhattan. So the numbers are

00:33:47.120 very different. And so I'm trying to, given I live in San Francisco and I'll probably get a whole

00:33:51.560 Honolulu is to try to speak about financial independence for half the population, at least

00:33:57.080 who live in expensive coastal cities and who want to stay in expensive coastal cities because that's

00:34:02.800 where their family and friends are. That makes sense. Yeah. Like middle class in Manhattan is going to be

00:34:06.940 a different number compared to someone that, as you said, in Mobile, Alabama.

00:34:10.260 Right. And so it's just, it's just the way it is, right? Things are expensive because of opportunity

00:34:17.480 and because oftentimes due to the lifestyle that area brings, but then, you know, there's obviously

00:34:23.020 going to be a breaking point where there's just too many people, traffic and also all sorts. So

00:34:27.060 people can geo arbitrage more power to them. But I found that it's harder to just pick up your life

00:34:34.000 and go live in a cheap place or in the country or around the world. If you don't have any,

00:34:39.200 you know, connections. Are there any other, other blind spots people have when it comes to

00:34:43.860 planning for financial independence? I think, you know, a lot of people,

00:34:48.140 this is actually an important blind spot. So a lot of people in the fire movement say,

00:34:52.660 yeah, just go move to a low cost area of the country in the South or in the Midwest.

00:34:56.320 That's fine. But if you're a minority, oftentimes it doesn't, it's not that easy. It just feels 0.97

00:35:03.020 like you're just not as comfortable, you know, because if you suddenly go from,

00:35:07.280 you know, you're a 30% racial population in your city or even 50%, like in San Francisco,

00:35:12.800 if you're an Asian person and you go to, you know, somewhere else and you're only 6% in

00:35:18.460 representation, it might feel a little weird. So that's a financial blind spot. You just can't

00:35:23.280 tell people, Hey, you, you can move and just lower your cost of living. I think a lot of blind spots,

00:35:28.800 you know, come from extrapolating your returns, you know, so we're all, we're all pretty wealthy now,

00:35:34.240 right. After a nine year bull run, anybody who's been investing in stocks and real estate,

00:35:39.720 private equity, whatever. And so the danger is extrapolating your compound returns over the past

00:35:45.780 nine years for the next nine years. Hopefully, you know, we continue to be all Warren Buffett,

00:35:52.040 but the reality is there's going to be down years. So last year, 2018 was a down 6% plus year on S&P 500.

00:36:00.220 And so if you have another down year and another down year, you know, your, your expectations

00:36:06.960 are going to be off your, your, your forecasts. There's other blind spots too. You know, a lot of

00:36:13.420 people compare someone else's middle to your beginning and they don't have the patience to

00:36:18.520 grind it out and to do what someone else has done to get to where they are. I think that's really

00:36:22.880 important. That's why everybody needs to understand the background and history of the person who is

00:36:28.940 espousing, whatever it is he or she is espousing. Another blind spot is that parenting, people think

00:36:35.040 parenting is easier and cheaper than it is. You know, if you are a full-time worker, parenting might

00:36:41.720 very well be easier because you're not parenting. You're, you're at your job 40 to 60 hours a week.

00:36:45.880 Right. But if you are a stay at home parent who has to deal with everything 24 seven, you know,

00:36:52.940 that can be much harder. And, you know, parenting takes a lot of time. It can take a lot of money

00:36:58.640 depending on where you live. So these are some of the blind spots that I see.

00:37:03.460 Speaking of kids, you know, you've got kids and this is something I'm always thinking about too,

00:37:07.200 is like, how do I prepare my kids financially for the future? Right. There's always that,

00:37:12.460 you know, I've had people on the podcast talking about how, you know, colleges that we, as we know it

00:37:16.660 today, like won't exist in 10 to 15 years. So I'm always thinking, man, should I be socking away money

00:37:23.000 in a, in a college savings account for my kids? If like, they're not even, they're going to go to

00:37:27.060 like online and get some sort of like, you know, online credential. I mean, how, what, what's your

00:37:32.220 approach to that for, you know, planning for your kids' financial future? Yeah. I mean, this is

00:37:36.760 something that I'm really excited about and I'm also nervous about. I don't, I don't know exactly.

00:37:42.360 I believe by the time my son goes to college and, you know, 16, 17 years, college is not going to be

00:37:49.780 as important as it is now at all. We're learning everything so much quicker and everything is free

00:37:59.000 online now that spending record amounts of money for tuition for four years is, is ridiculous in my

00:38:07.440 opinion. You know, it used to take, I don't know, 10 hours to go to the library to look up, check out

00:38:12.300 books and do research. Now you can do everything online. So why does it still take four years

00:38:17.560 and record high tuition to get that same college degree? It doesn't make sense at all.

00:38:22.600 So I'm prepared for the college system to change. Maybe it'll change to only two years or three years

00:38:28.400 required in 16, 17 years, but I certainly am not wanting to spend record amounts on an education

00:38:37.420 that is not going to provide the returns. So what am I doing? Well, I'm hedging. I am contributing

00:38:44.940 15,000 a year, which is the state gift maximum per year to a five to nine plan. Hopefully it'll make

00:38:54.120 some money and earn some tax deferred income and returns along the way. But two, my greatest hedge is

00:39:01.860 to continue running financial samurai so that there's something that I can teach my son when he's

00:39:08.820 old enough to learn about communication skills, writing, speaking, maybe, maybe videography,

00:39:15.200 maybe community building, maybe SEO, content marketing, business development and so forth.

00:39:20.800 The funny thing about a lifestyle business is that it has the same components, theoretically the same

00:39:26.300 departments as a much larger business. You know, you got the PR department, CEO, CFO, CMO, whatever it

00:39:33.300 is, you know, I could create some role for him so he can learn and hopefully he'll be interested in

00:39:38.780 learning something. And I remember when I was going to business school part-time, I remember being so

00:39:44.480 much more interested in the subjects because I was learning something in the classroom and then

00:39:48.220 utilizing what I learned in my real job in finance. And so, you know, when we go through school,

00:39:55.340 I mean, none of us remember like anything of what we learned in grade school, right? Like chemistry

00:40:00.100 and biology, it's all out the window. But hopefully I can teach him some cool stuff that is relevant to

00:40:08.620 what he's learning in school so that he can find something more interesting by the time he does go

00:40:13.640 to college, if at all. I like that. That's kind of what I've been doing. I'm hedging. I'm sucking away

00:40:17.380 money in the 529 account, but also planning for college to be not around. So yeah, we'll see

00:40:25.280 how it shakes out. We've got my kids 8. We've got 10 years.

00:40:30.040 Yeah, my kid's 21. So I think college is like the last bastion of, you know, the elite who want to

00:40:38.040 protect this, you know, their institutions. And it doesn't really matter anymore. I really don't

00:40:44.080 think college matters anymore in 6 to 17 years.

00:40:46.180 Well, Sam, where can people go to learn more about your work?

00:40:49.000 You can come to financialsamurai.com. I'm always there. Or you can go to

00:40:52.780 financialsamurai.com forward slash forums. And there's a great community of people there who

00:40:58.440 are looking to build wealth, largely through income generation and investing.

00:41:03.440 Sam Dogen, thanks for your time. It's been a pleasure.

00:41:05.360 Oh, thanks so much.

00:41:18.520 Well, that wraps up another edition of the AOM podcast. Check out our website,

00:41:22.400 artofmanliness.com, where you have thousands of in-depth articles about personal finance,

00:41:26.520 social skills, personal fitness, you name it, we've got it. Also, while you're there,

00:41:31.080 check out our podcast archives at artofmanliness.com slash podcast. And if you haven't done so

00:41:35.740 already, I'd appreciate if you take one minute to give us a review on iTunes or Stitcher. It helps

00:41:39.480 out a lot. And if you've done that already, thank you. Please consider sharing the show with a friend

00:41:43.120 or family member who would think we get something out of it. As always, thank you for the community

00:41:46.300 support. And until next time, this is Brett McKay telling you to not only listen to the AOM podcast,

00:41:50.360 but put what you've heard into action.

00:42:01.080 Thank you.

The Art of Manliness - February 11, 2019

#481： Building Financial Independence Beyond the Stock Market

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