#481： Building Financial Independence Beyond the Stock Market
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Summary
Sam Dogen is the founder of Financial Samurai, a blog that focuses on financial advice and tips aimed at helping you become financially independent. In this episode, we talk about how his career in equities shaped his personal finance philosophy and made him leery of putting too much wealth in the stock market.
Transcript
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Brett McKay here and welcome to another edition of the Art of Manliness podcast.
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Financial independence is a goal for a lot of folks, but what does it take to get there?
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My guest day explores that question on his website, Financial Samurai. His name is Sam
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Dogen, and before writing about money online, he worked in finance. We began our conversation
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discussing how his career in equities shaped his personal finance philosophy and made him leery
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of putting too much wealth in the stock market. Sam shares why he recommends putting a lower
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percentage of your money in stocks than is often recommended in mainstream financial advice,
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how that percentage should shift as you get older, and alternative ways to invest, build your wealth,
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and create multiple streams of income that will give you more control over your fortunes.
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Sam then shares what it means to be financially independent and some of the blind spots he
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thinks exists in the fire or financial independence retire early movement. We end our conversation
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talking about how to plan your financial life for the future, especially concerning what the
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changing world would be like for your kids. After the show's over, check out our show notes at
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aom.is slash financial samurai. Sam Dogen, welcome to the show.
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Sam Dogen, thank you very much. Glad to be here.
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So you run a website, one of the blogs I subscribe to in my RSS feed, Financial Samurai. I'm not sure
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exactly how I stumbled upon your website, but I've been a longtime reader. What I like about it,
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it's different from a lot of the other personal finance blogs out there. We'll talk about what
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makes your sort of approach different. But before we get there, let's talk about your background and
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how it influenced your philosophy towards personal finance.
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Well, thanks for being a reader on my site for so long. I've been a reader and listener of your
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site and podcast for a while as well, and I've watched it grow so tremendously. So congratulations
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My background is pretty simple, I guess. My parents were in the US Foreign Service. I grew up overseas in
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Asia and in Zambia for 13 years before coming to the United States for college. And they were always
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really frugal. Whenever I'd go out to eat, my parents would admonish me for ordering anything
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but water. And so I knew kind of their frugal ways since I was a kid. And so I decided to go to public
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school, the College of William & Mary, which is only about $2,800 a year at the time. And then I landed
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my dream job in finance. And so from 1999 to 2012, I worked in the equities department of a couple
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major Wall Street firms. And then in 2009, during the financial crisis, I decided to start Financial
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Samurai as a cathartic way to deal with the financial crisis. So I was thinking, well, instead
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of smoking or drinking, maybe it'd be healthier to write because I love to write and I love to connect
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and hear other people's perspectives. So I started Samurai in 2009. And by 2011, it was actually making
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somewhat of a livable income stream in San Francisco. And so in 2012, I negotiated a
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severance after 11 years with one firm. And I decided to do this full-time and be free.
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So you mentioned you started this in 2009, right? When the financial crisis hit. Were you affected
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personally by that? Was your bottom line, your net worth adversely affected?
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Absolutely. I was crushed. So I started in 1999, right? 10 years saving, investing really,
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really diligently. I remember the first month I started working, I'd get into the office at 5.30
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a.m. And then I wouldn't leave until 7.30, 8 p.m. all the time. And I knew after about a month,
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I couldn't last. So I was basically saving and investing every single dollar I could afford.
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I lived in a studio with another friend for a couple of years because I knew I couldn't last in
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this industry. So I actually lasted about eight years longer than I thought I would to 2012.
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So during the financial crisis, my net worth got crushed by, I would say, maybe 40%
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at the bottom in a matter of about six months that took 10 years to accumulate.
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And so before this time, were you following sort of like a traditional mainstream approach to personal
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finances? Like where you said, okay, I'm going to set aside this amount of money all in stocks
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because I'm young, because I got a long time for that to grow. And even if there are setbacks,
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I got time to make up. Were you following that sort of thing? And did your philosophy change after
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So because I worked in finance and equities specifically, I decided to basically invest in
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almost everything but equities. So my investment of choice was real estate once I started accumulating
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a large enough nut. And so I diversified away from the stock market after maxing out my 401k and
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receiving company stock and stuff like that, but investing basically in San Francisco real estate
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and Lake Tahoe real estate. So I figured my career was already leveraged to real estate,
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my bonus, my pay, my promotion. So I didn't want to have more in equities. And it was interesting
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because when I started in 1999, it was bull market. It was a dot-com mania. And then by 2000,
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dot-com bubble burst. And then by 2001, a lot of paper millionaires lost a lot of money and a lot
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of people got fired in the industry. And then so that was a wake-up call. And then we had good times
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all the way up until 2008. And then things blew up again. So my history in the equities department
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and in investing hasn't been quite a glorious one, even though the stock market is close to record highs
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So like I said earlier, one of the reasons I enjoy reading the articles on your website is because
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your philosophy towards personal finance seems to go slightly against what you typically see from
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accepted personal financial advice. I mean, so how would you say your philosophy differs?
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I mean, so start off, what do you think is the overarching philosophy that you have towards money?
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And how does that differ from sort of mainstream advice?
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I strongly believe that we all have the ability and deserve to be rich. I really come with that
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mindset that we all deserve to be extraordinarily wealthy if we want to be. Now, obviously, there's
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going to be more challenges. We're going to face more hurdles than some other people. Some people
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have huge headstarts with their parents, with their jobs or whatever. But thanks to the internet,
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we can learn other people's stories, we can learn other people's archetypes, and follow along and
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learn from others so we can ourselves get better. I have some fundamental thoughts about personal
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finance. And that is, one, if the amount of money you're saving each month doesn't hurt, you're not saving
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enough. And then two, I think it's important that everybody forecasts their misery. And that ties
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together with fundamental number one. Too many people, I think, don't forecast their future.
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You know, they start a job and they think, wow, this is so fun. You know, my colleagues are awesome.
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My boss is great. But as we all know that life happens, right? Life happens at our job, things get
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boring, people get fired, exogenous variables happen all the time. And it's important to look ahead five,
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10 years from now, and constantly be thinking, what are some of the things that might trip
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you up? What are some things, good and bad, that might help or hurt you along your path to financial
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freedom? So when you start practicing thinking ahead, often, whether it's in your career, your money,
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your business, you start internalizing this different way of thinking, where you're just not
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some zombie sitting there in the present, thinking about what you got, while you're thinking ahead,
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and hopefully making rational decisions to get to where you want to go.
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All right. So it sounds like, yeah, number two is like, think worst case scenario. Like,
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what's your backup plan if things don't go right?
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Always think about blue sky scenario, realistic scenario, and worst case scenario. And I think,
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you know, it's going to be optimistic. But if we have a default assumption of everything going out
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great, that's probably really dangerous for the most of us.
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And I guess one of those default assumptions that you see frequently in the personal finance world is
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like, going back to equities. It's like, whenever you read these personal finance books, they always
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assume like 8% return on investment. That might not necessarily be the case for some people.
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Oh, no. There's like huge sequence of risk issues. If you look back at 2000, you saw losses in 2000
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of around 12%. And then 2001, you saw another down year. And then in 2002, you saw another down
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year. So three years in a row where you ended up losing about 42 to 45% of your wealth. So if you
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actually had a significant amount of wealth, then you'd be in trouble if you wanted to retire around
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then. And then of course, we had another downturn in 2009, right?
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Right. And then another thing people don't think about too, is like, if you lose, the other sort
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of mainstream personal finance advice is like, well, if you lose in the stock, you have time to recoup
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that. But they often overlook is that sometimes it takes longer for you to recoup those losses than
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you think it would take. Oh, yeah. I mean, there's a, so if you lose 50%, you've got to make 100% just
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to get back to even. But during that time back to 100%, you're losing time. And so the older you are,
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naturally, the more you're going to appreciate your time because you have less of it.
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And I think a lot of people maybe in their 20s or in their 30s will underappreciate time and think,
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you know, they're invincible and they have all the time in the world to get this back.
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But you will soon realize maybe when you hit 40 or plus, and if you have a family to raise and people
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to take care of that, you really don't want to waste so much time trying to get back to even anymore.
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So at some point, you've got to figure out how much is enough for you. And you've got to dial
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back your risk tolerance and say, you know what, maybe four to 5% returns a year on my portfolio or
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on my overall net worth is good enough. Maybe it's not worth the risk of trying to make a 10% plus
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return, because it really doesn't change the quality of your life. And it could actually
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significantly impact negatively impact your life by having you have to work more or stress more
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just for money. So yeah, that kind of goes to one way you differ from personal finance,
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like mainstream personal finance stuff. So the article of faith is that, you know, the younger
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you are, the more money you should have in equities. I think it's like 90% is something like that,
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the number you see thrown around. But you personally don't do that. You said that you,
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you know, because you worked in equities, most of your money went out of equities and did things
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like real estate or whatever. So it seems like it's a very conservative approach.
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How do you think that conservative approach helps you win in the long run?
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I don't know if it's conservative. I think it's more rational. I think people who are putting 80 to
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90% of their net worth in the stock market, I think might need to do some soul searching here and look
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at their net worth distribution and look at other asset classes like real estate, like fixed income,
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like your own business equity, because life is quite complicated. 80, 90%, no way. I mean,
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yeah, maybe when you're in your 20s and you don't have a family and you have, you're a vagabond or
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you just want to move to job every two to three years. But in my view, wealth is more about real
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assets, right? So assets that you can derive utility from, that you can live in, that you can
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generate rental income. Stocks, you can't really derive any utility. You need actually a purpose
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for your stock investments. And the issue with stocks, I mean, don't get me wrong, I've got about
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25% of my net worth in stocks. But the issue with stocks is that it goes up kind of slowly and then
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it just crashes very quickly due to panic. And if you don't have a discipline for what you are investing
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for, you're kind of throwing money into a vehicle that is shown to do well over time.
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But there's really no utility. And that is something where I like to invest in something
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where it could potentially go up, appreciate in value, and provide utility. You know, two things,
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not just, oh, it could go up and make me richer. I mean, who cares?
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Well, it seems also too, like by focusing on things like real estate or your business,
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or even just acquiring skills so you can ask for and negotiate for a raise,
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like those are things that are in your control. Like the stock market,
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Yeah, you're a minority investor that is subject to the whims of, you know, the government,
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the Federal Reserve, fraud, whatever. And, you know, I think, you know, the stock market is great
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for those who want to, you know, give up control and just invest passively. So at the same time,
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you know, if you believe in yourself, if you want to be active and try to build wealth,
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I think you can do a little bit better job through a business or through real estate,
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frankly. You know, there's obviously some great stocks that I like, because I really believe in
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the business people and the product, you know, Amazon, Tesla, you know, these are amazing products.
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And I would be willing to bet on these people. So one of the interesting things that I noticed
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from my 20s to now my 40s, is that not only do I invest in public equities based on the fundamentals,
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but I really try to invest in the people. Like the people who I see are business visionaries who
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can get the job done, and who can think ahead always three to five years and anticipate.
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Because, you know, Financial Samurai, even though it's just a personal finance side,
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it's our lifestyle business. And I like to think ahead as well to see if I can grow that,
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So let's talk about like, you know, an investment strategy, we'll call it that,
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a wealth strategy for someone who's in their, say, 30s. So you mentioned someone that they're
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in their 20s, no family, no strings attached, you know, putting most of your money, 90% of your
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wealth in stocks, probably not a bad idea. But let's say you're in your 30s, family, you have a
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house. So there's a lot more at stake if you, you know, your net worth takes a beating. So what does
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like a strategy look like for that person? I know, you know, specifics, it's going to vary
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from person to person. But sort of generally, what does that look like for you?
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It's going to be dependent on everybody's individual earnings powers and ability. But
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if you're in your 30s, and you have a family, you should be at least neutral real estate by owning
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your primary residence. So neutral real estate is just floating up and down with the water and the
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tides. You're short the real estate market if you're renting, right? You are a price taker,
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you're paying rent, and you're getting no equity. So you're short the market. And you're only long
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real estate if you are long, or if you own more than one property. And this is really important
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to for people to think about. If you short the stock market over a 20 year period, you will probably
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lose a lot of money. And so for those who are anti real estate, renting for 20 years is also quite
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similar to shorting the stock market over 20 year period due to inflation, and the normal appreciation
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of assets due to labor, and so forth. So I think, you know, someone's in their 30s with a family and so
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forth like that, you should probably have something around 30% to 40% in equities, 30 to 40% in real
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estate. So you're at least neutral real estate, and the rest in more stable, lower risk investments,
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like fixed income and CDs. I think you should always have 5 to 10% of your net worth, at least
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in low risk, stable income securities. So okay, real estate, you're big on that. What if you like
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you don't want to be a land, a landlord, right? Like, I mean, I've, I have friends who that's what
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they do. And it sounds like a nightmare sometimes, because the tenants are just terrible. They just
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trash it up. They're always having to do repairs. So that's something else to consider too, if you
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want, you know, if you're thinking about doing real estate, but are there other ways to invest
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in real estate without having to do that? Yeah, you can just invest in a REIT and be a
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commercial property landlord that way. There are many different types of REITs. You can invest in
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real estate crowdfunding, which is where you invest, you know, a thousand to 10,000 at least in these
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commercial properties across the country. And again, when you're talking about being a landlord,
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you're talking about going long real estate. It's going beyond your primary residence.
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So once at a time, own your primary residence, if you know, you're going to be there for five,
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10 plus years. And I found that stability, stability does wealth pretty good. You know,
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no matter what people say about job hopping every two to three years or whatever, just finding your
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community, you know, find, find yourself in your twenties or whatever. But after about 10 years
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of looking, uh, you know, I think you should probably find or realize that there's a place
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in the world where you want to settle down and establish some roots. And once you establish some
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roots, you see a lot of positive network effects from your relationships, your network, uh, the other
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opportunities around that city and your investments in real estate and the stock market. You can, you can
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live anywhere, but there's positive network effects. If you can stay in one place for a certain
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period of time. Right. And that goes counter to a lot of, what a lot of young people, they think
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they got to constantly move, job hop, job hop, move to the city. It might be good to like, just settle
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in a suburb where, you know, you, you're happy, right? Hey, you know, sometimes it takes longer to
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find yourself. I thought, you know, I was really lucky to find a job in finance and I would have gone
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anywhere in the country and in the world to get that job. And so I just kind of went where the job
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took me, but eventually I wanted to settle down. And when I found San Francisco in 2001, I was like,
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you know what? This place is cheaper than Manhattan. Uh, it's more diverse. The weather is great, good
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outdoor life. And it was closer to Hawaii where my dad's side of the family is from and Taiwan where my
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mom's side of the family is from. So I figured, Hey, why not set up shop? And so I've been here ever
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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
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identify something quicker where you're going to be happy living, I think, uh, I think that's a great
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thing. So you mentioned that breakdown for someone in their thirties with a family, like 20 to 30 in
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stocks, 30 to 40 in real estate, and then some of the rest and sort of very stable things like CDs
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or fixed income type things. Uh, does that change as you get into your forties or fifties?
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It definitely changes. And there's just so many different permutations that it's hard for me to give
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some exact recommendation. Sure. But I do believe that everybody should figure out how to build their
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own long-term growth equity. So in other words, starting a business and you know, a lot of people
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are like, well, I don't know how to start a business or whatever. Neither did I. But if you look at the
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world's wealthiest people and their asset allocation breakdown, the wealthier they are, the larger
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percentage of the net worth comes from equity in their business. And it doesn't matter what kind
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of business it is. It's just equity in their business. Because when you have a business,
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you can not only earn money from that business, you can hire your friends and family for that business.
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And you can sell your business for multiples of revenue or earnings. Whereas if you have a job
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only, you can only sell your time. And so you don't want to limit yourself. The way I look at my online
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business is that I run it because I enjoy writing and I enjoy connecting with other people. But I also
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run it because I have a son now. And I know that life is going to be hard for him as he gets older
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because of globalization, because of the speed at which information travels, and because of the rigors
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of trying to get into a good school, and so forth. And so my motivation now is to keep the business
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running long enough until my son tells me, you know, I want to have nothing to do with learning
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about online marketing or writing or anything like that. Because I think I think world is going to get
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much, much tougher. And it's going to get much more bifurcated to those who have. And then those who
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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
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you have to completely quit your job to start a business. I mean, you're a big proponent of
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having a side hustle where just sort of a side stream of income that supplements your
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income from your career. Oh, absolutely. You don't want to rely just on your job income. There's
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no way in hell if I was back in my 20s, 30s, that I would only have one job. You know, we know that
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companies aren't as loyal as they once were. And so therefore, you have a higher risk of getting
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fired at any given moment in time. And the great thing is, is that the internet has allowed you
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to develop so many side hustles, right? From Upwork to Craigslist to TaskRabbit to, you know,
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ride share driving. These are side hustles. And then there's obviously the businesses where you
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can start your own website to sell stuff, or you can write stuff, you can build your brand. I mean,
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it's just endless. And it's just so easy to start now. You know, you can just start this podcast,
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get enough listeners, you can get advertising dollars. It's just an endless variety of ways
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to make money. And I'm so excited for people who are growing up in this era right now who are
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younger, who can take advantage. And then also, it can turn into a full-time gig eventually,
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possibly. Oh, yeah. Definitely possibly, right? The best is if you're working, let's say you're
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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
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a.m. Or, you know, after you get home, you do that for two, three hours. You tinker with it. You toy
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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
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they screw you or something. So you got to be strategic about that. But I worked on Financial
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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.
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And I was like, hey, Sam, I'd like to advertise on your website. If you put up this advertiser,
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I'll pay you $1,200. And I was like, wow, $1,200? Really? I was like, okay, sign me up.
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And so I put up that code in about 25 minutes. And then he PayPal'd me the money instantly.
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And I was like, oh, time for another beer. And that was the moment where I thought,
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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
00:25:27.880
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
00:30:01.040
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.
00:32:29.360
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
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
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.
00:41:18.520
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
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00:41:31.080
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00:41:35.740
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00:41:39.480
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00:41:43.120
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00:41:46.300
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