Data-Backed Answers to Personal Finance Controversies
Episode Stats
Summary
Nick Majuli is the Chief Operating Officer and Data Scientist at Ritholtz Wealth Management, as well as the author of Just Keep Buying: Proven Ways to Save Money and Build Wealth. In this episode, Nick explains what the data says about how you should approach the questions I ve already mentioned. He also shares how to spend your money without feeling guilty by using the 2X rule, the 3 criteria you should meet before you consider buying a home, the best way to approach the idea of dollar cost averaging, and more.
Transcript
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Brett McKay here, and welcome to another edition of the Art of Manliness podcast.
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Dip your toes in the world of personal finance, and you can find plenty of questions that
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When it comes to the stock market, should you buy the dip?
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On his blog of dollars and data, my guest cuts through the personal finance noise by
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finding answers based on numbers rather than conjecture, and then converting this research
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His name is Nick Majuli, and he's the Chief Operating Officer and Data Scientist at Ritholtz
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Wealth Management, as well as the author of Just Keep Buying, Proven Ways to Save Money
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Today on the show, Nick explains what the data says about how you should approach the questions
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He also shares how to spend your money without feeling guilty by using the 2X rule, the three
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criteria you should meet before you consider buying a home, the best way to approach the
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We end our conversation with the right mindset to adopt in our volatile economy.
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After the show is over, check out our show notes at awim.is slash finance answers.
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So you are the Chief Operating Officer of Ritholtz Wealth Management, and you got a new book
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out called Just Keep Buying, Proven Ways to Save Money and Build Wealth.
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This is where you just use a lot of data to show people how to manage or think about their
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money at different parts of their financial life.
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But you got an interesting background because you didn't start off your career in wealth
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How did you get involved with wealth management and personal finance?
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Yeah, so I originally started in litigation consulting, which is a little different from management
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consulting because it's like backward looking and very analytical, while management consulting
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is very forward looking, trying to improve a business, etc.
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But basically how I got into wealth management was I was like, hey, I'm going to start blogging.
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I'm going to start writing about it in the beginning of 2017.
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I wasn't really making money on it at the beginning.
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And I met a lot of people through Twitter, through promoting the blog.
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And some of those people, I actually went out to a conference in late 2017, met some of
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these people in real life who actually had a wealth management firm.
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And that's how they kind of brought in leads was through content marketing.
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And next thing you know, six months after that, mid-2018, I joined a wealth management
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So it's been a fun journey just doing that, how you can take a side hustle.
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It's that they're both very correlated in that way.
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Well, what's been your approach to financial writing?
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So what kind of data are you looking at to help just regular people inform their personal
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I mean, a lot of the data I'm using is market data.
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I'm trying to see like, okay, for example, US stock returns or international stock returns
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and just analyzing it in a lot of different ways.
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Whether we're doing a timing question, like how often should you be buying?
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There's also data from the Bureau of Labor Statistics, like on consumer expenditures, how people
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are spending money, all those types of questions.
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There's just data out there that you can dig into and just answer questions and see if a
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And I think in the book and Just Keep Buying, I basically took my greatest hits of stuff I've
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been writing over the last five years and just put it all into one place and said, hey,
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And I think that's been really helpful just to kind of go through a lot of our core beliefs
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in personal finance and investing and debunk the ones that I don't think are real.
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So let's talk about some of these principles and these greatest hits you write about in
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The first principle you talk about is it's kind of in your face.
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It's saving is for the poor, investing is for the rich.
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Well, in this case, when I say poor, I mean it on both an absolute level and a relative
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So when I say absolute, like if you're truly just don't have any money, you're below the
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But also for someone who's like, let's say, you know, late teens, early 20s, maybe they're
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I would consider them poor relative to their future selves, right?
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Assuming they're going to save and invest diligently, etc.
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And so when I say poor, I'm saying like the issue, I really realized all this.
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You know, when I was 23 years old, I spent so much time like, you know, trying to pick my
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asset allocation, overanalyzing my investments.
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But at the time, you know, when I was 23, I only had $1,000 to my name.
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So like, even if I got, you know, a 10% return, that's, you know, what's the math on that?
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And yet at the same time, I was going out and, you know, blowing $100 by, you know, going
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to dinner, going getting drinks, you know, Uber home, all that stuff, you know, and there
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So like my investment return for an entire year, I could have spent in one night easily
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when I was living in San Francisco at the time.
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So I think when I say savings for the poor, it's like, what do you need to focus on when
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you're 23 years old or 22, or just kind of getting into the job market, or you don't
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have a lot of money, you need to focus on your savings, you need to focus on, you know,
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earning more incomes, you can actually save money, spending all this time trying to over
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engineer your investment portfolio is mostly wasted time, you know, for someone, I'm not
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But, you know, I know people that spend so much time trying to analyze the markets, this
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And it's like, it's like, bro, you have like $10,000 to invest, even if you could get a, you
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And how many hours did you spend to get that $1,000, right?
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You probably would have been better off working at McDonald's and a side job, you know, and
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when you actually analyze the number of hours people put in for something, like just to
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try and get extra return, it's, it's ridiculous.
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So I think that's where that phrase comes from.
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Because when you're poor, when you don't have a lot of money, you really need to focus on
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And then once you actually build up a nest egg, you have a lot of money or considerable amount
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of money, then you can start like really focusing on your investment.
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That's where every little percentage makes a difference.
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Because like on a, like, let's imagine on $10 million, I imagine a 10 million bucks,
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a 1% difference, you know, is pretty significant versus, you know, a 1% difference on $1,000
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And when you say saving, like you need to save your money, you're not saying just put it
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You're like, you're going to be investing it, but you're just not focused on like allocation
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and like market, you know, all this weird stuff with you can do with investing.
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So I apologize when I say savings for the rich, like you need to save that money.
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Like that's, that's the premise of the book is like, you're always investing your money.
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It's just, you need to focus more on, you know, how much you can actually, you know,
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save and invest early on before you start over-optimizing every single thing in your
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So I'm not saying allocation doesn't matter at all.
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That would be silly, but it's just like, you don't need to spend all the hours I spend
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like trying to, you know, supercharge my investments when you don't have a lot of money.
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Like now that I'm 32, I, you know, it matters a lot more than when I was 23.
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And the easiest way to, you know, I talk about this in the book and the first chapter,
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I think is one of the most valuable chapters in there is just like, think about how much
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Let's say you could save, I don't know, $5,000 in the next year.
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Well, how much can your investments earn you in the next year?
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Let's say you took a, you know, a fair, let's say you're going to get a 5% return.
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If you had, you know, 10,000 bucks, that's, you know, $500, right?
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So $5,000 you could save versus your investments earn you 500 bucks.
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So you need to focus on that and you need to keep building that and, and in reinvesting
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that money until the investments can earn you as much or more than what you could save
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And so you'll see by the time you're, you know, 40, 50, your investments, if you do
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this properly, should be able to earn you more than you could save in a year.
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And that's how, you know, you've, you've done the game properly.
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And that's when you start to really, really focus on your investments once you're much
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I remember when I was in your money or your life, I remember reading that book had a big
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And that was that one point is like, if you're the money you make from, I mean, I guess in your
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money, your life, they focus, they focused on CDs, which you probably shouldn't do anymore
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these days, but if your money was, if your CDs were earning more than your income, then
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So that's, that's one way you could look at it.
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The CDs thing is not really a thing anymore, but yeah, I completely agree.
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I remember when I was a teenager, I had this adult, this mentor, and I remember we were driving
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in the car to someplace and he said, Brett, if you do these two things, you're going to be okay.
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If you set aside 10% of your money for, for giving and then 20% for yourself, save.
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And like, I listened, I was like, oh yeah, this sounds good.
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I see in the book, I don't really like giving specific answers to this because the issue is
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our incomes are a lot more variable today than they were when I think a lot of the savings
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You have to imagine like, go back to like the 1950s.
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It's very stable, pension, a lot more stability.
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So saving was something that was just like, oh, I'll just save 10% of every paycheck or 20%.
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So that's why a lot of the savings rules kind of came out that way.
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But now today we usually have two income earners.
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We now have side hustles, like income's not far more variable.
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Like let's say if you were an Uber driver or something,
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like your income is going to vary every time you go out, right?
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So because incomes vary so much more today, and there's a lot of data showing this,
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it's really hard to say like always save the same amount because given, you know,
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different costs and different income, how can you save the same amount every month?
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You have to cut back or you have to do all sorts of stuff.
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And so what that means is the real focus, you should really focus on just building your
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income over time and obviously spending, you know, what you want to live a comfortable
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lifestyle and then anything beyond that is what you save.
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Now, of course you're like, well, Nick, I can just keep spending more and more and more.
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But the point isn't to like, you know, lifestyle creep yourself into having no savings.
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It's just to be like, okay, I need this to like live my life and live comfortably.
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And then beyond that, you need to build your income.
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That's like, I think it's the way to like, you can, this is the lowest stress way to save
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money and also the data supports it because there's no one right, you know, savings role.
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And the example I give in the book, when I was living in Boston, I had a 40% savings rate
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As soon as I moved to New York, I didn't have any more roommates.
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And also I took like a slight pay cut when I first moved here.
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So like my savings rate went from 40% after tax to like 4% after tax.
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Now I could have done 20% each year, but I'd have been under saving in Boston.
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And then I would have been living a really rough lifestyle in New York by trying to save
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20% when I didn't really have money to, you know?
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So I think there's times when it's okay to save more than you might necessarily need
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And there's times when you can, you know, save less because, you know, you're, you're
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going, you're getting higher costs or something at the time.
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So those are the things I would, I would try to focus on.
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And you also highlight research that says when you're safe, like if you feel like you
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have to save 20%, but like, it's not possible, that's what causes a lot of stress in your,
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And so some people say, well, just take that 20% of your paycheck right away.
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But that doesn't change the fact that like, what if you don't have money?
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Are you going to go into credit card debt now to do that?
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Savings always have to, I know people say pay yourself first, but realistically, like
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you have to pay yourself last, like at the end, even though I agree that like pay yourself
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first is a better idea if you can live off the rest of the budget.
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But in the event where your costs are too higher, like for example, inflation's going up,
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you know, used to go and it used to cost X dollars to fill up your tank.
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Like now it costs X times 10 or times 1.1, 10% higher.
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Well, I paid myself first and I don't have any extra money to fill up my tank now.
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I think that's, that's probably, that's really useful for a lot of people.
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So in the personal finance world, you see debate about which is the best way to build
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If you're trying to save more, there's two options you really have.
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Now cutting your spending, the issue is just has limits.
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And I've just, I've looked into the data as I talked about earlier about Bureau of Labor
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There's something called the Consumer Expenditure Survey.
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And basically if you look at the households in the bottom 20% or the bottom 40%, like there's
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Like here's how much they spend on transportation.
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And like, there's not a lot of money they're spending.
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Like once you're at that level, there's just a minimum level of spending you need to have
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So they're really, the only way out, the only way to kind of save more that's sustainable
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I mean, the highest, the most positively correlated thing with savings rate is income.
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Those with higher incomes have higher savings rate.
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We have like data going back to like to the 1930s that show that like show like even like
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people with more wealth tend to have higher savings rate.
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People with more income tend to have higher savings rate.
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Like you're like, oh, obviously if I had way more income, I could save more.
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But like, then why is there's this huge contingent of people in the personal finance community
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You can do that, but it's a short-term solution and it's not, it's not viable long-term.
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It's just, and it's also far more stressful to always be thinking about every single dollar
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It's not, it's not a, I think a mentally healthy way to live.
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I think people, the financial advice goes to that because it's easy, right?
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It's like easier to just be like, well, I'll just cut Netflix.
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I can do that right away and see a win as opposed to like, well, how can I figure out how to make
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It's far harder, but that's, I mean, this is about sustainability, right?
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Just as like, you know, if you want to build something that's sustainable, it takes a long
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time, like, you know, I've been blogging for over five years now and I didn't make really
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I made like a thousand dollars a year considering I'm spending 10 hours a week, you know, I'm
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spending 500, I'm spending, I'm making $2 an hour for the first three years.
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And then I started running ads because then my audience got big enough and now I make more
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So it's, it's obviously been helpful, but that's an example of like, yeah, it can take a long
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And I know there's far better monetization opportunities than starting a blog.
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I think I did one of the worst ones out there, if I'm being honest.
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So, you know, just getting a side hustle, things like that.
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That's how you can grow your income, teach people, tutoring.
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There's all sorts of different things people can do.
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And especially with the gig economy where you can make extra money, find a skill that
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you really, or some expertise you have and sell that.
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There's a lot of ways to grow your income, but ultimately all that income should be used
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And those things are going to start paying you.
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That's like stocks, real estate, you know, index funds, things of that sort that'll pay you
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That's kind of the main goal I think of, of all of this.
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So find ways to increase your income because that'll allow you to save more.
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And because you can save more, you'll eventually get to that crossover point where your money's
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Oh, it's always working for you from the very beginning.
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But yeah, at some point it's going to be ideally, you know, in a good year, let's imagine like
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this, you know, in a good year, your investment portfolio should earn you more than you could
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And you can imagine, let's go back to the $10 million person, right?
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Do you know anyone that could save a million dollars after tax in a year?
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You have to have a very, very high paying job to do that.
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So, you know, but getting to, you know, getting to 10 million is obviously going to be difficult
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But you see the problem once you have that wealth or you see the issue, once you have
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that wealth, it's much easier to build more wealth.
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So the key is to kind of get there and just build it over time.
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This reminds me, we've had Ramit Setti on the podcast and he has this rubric I really
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It's like, instead of thinking about $5 questions, like think about $5,000 questions, right?
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Like figure out how you can like make $5,000 more by me, you know, taking a side hustle
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or me asking for a raise instead of thinking about, well, if I cut $5 a day for my spending,
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You know, when I first started the blog, I wasn't thinking about any $10,000 questions
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You know, I was just writing and just doing it because I love it.
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So I think a lot of times you have to follow your interests because like I can tell you
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to pay, go do this thing because it's going to make you more money.
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And like, unless you love it or you love the money so much, it's going to be really difficult
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So that's the, that's what I would say is like, find something that really follow your
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And if you can, you know, find a way to kind of monetize that in some way where that's
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teaching people or selling a product or something like that, that's the way to go.
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And I think it's with the internet economy, it's so much easier today.
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Like even places like Gumroad, you can sell digital products to anybody, right?
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But, you know, that's why I use Twitter, Reddit, things like that, that can help, you
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know, find people, you know, that are like-minded that might like your products.
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Well, let's go back to this idea of, you know, a lot of personal finance advice out there
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is about basically making you feel bad about spending money, right?
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Everyone's heard like the avocado toast meme that's been going on for a couple of years
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But you have a system that allows you to spend money on what you want, like what will give
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you fulfillment and meaning while at the same time saving.
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So anytime you want to splurge on something, the 2X rule is basically just like, let's
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say you want to buy a nice pair of dress shoes, right?
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If you want, if you consider that a splurge, you would save $400 for the dress shoes and
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And you take that other $400 and you can invest it in income producing assets, you know, such
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as, you know, S&P 500 or international stocks or, you know, a REIT ETF, you know, real estate
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investment trust, things like that, that'll, that'll earn you income.
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So if you ever feel that guilt of splurging, this is a way to kind of offset that.
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You can also donate that money too, if you don't want to invest.
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So there's a lot of different ways you can, you can do this.
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It's just a simple rule to kind of get over spending guilt.
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Cause a lot of times we, we guilt ourselves into spending on ourselves, which is kind
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I mean, that's why we work for this money anyways, right?
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Why not, you know, spend it on ourselves at times, but because we guilt ourselves so much,
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I think that's a simple way to kind of get over that.
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But in addition, I think just people always talk about, oh, I, you know, I want to maximize
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I don't think that's actually, that's a decent rule, but I think a better rule is maximizing
00:18:04.840
And I think the difference, a very simple example can show you the difference.
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I would say if you're like into like rock climbing or mountain climbing, things like that,
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like climbing Mount Everest is probably a very fulfilling experience.
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I would say it's probably not a happy experience.
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Like based on my understanding of those people that go up there and the oxygen deprivation,
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how, you know, physically difficult it is to do that.
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Like I would not say you're in, you're in a happy state while you're there, but I would
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say it's a fulfilling thing to go through that journey.
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So I think that's the thing to think about is like, what's going to fulfill me in the long
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run and then spend money on those categories versus like, oh, well, this is just going
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I think they can be correlated, but they're not always the same.
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And I think just to figure those out, that's kind of the hard part.
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I think there's another way you can find, you know, okay, we've kind of been knocking,
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looking ways to like cut spending, but I think that's a, that's a useful rubric, you
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know, just focus spending your money on the things that actually bring you fulfillment
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and then cut spending on the stuff that like, man, this just might give me a little happiness
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and fun momentarily, but it really doesn't do much for me in the longterm.
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So like for me, I don't really spend a lot of money on clothes.
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I'm not much of a foodie, so I like, I'm not big into like restaurants, but like what
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I love to spend my money on is a workout equipment and books.
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And I'm okay with that, but I'm for another person might be, well, they love buying clothes
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Instead of spending money on, I don't know, workout equipment, if that doesn't bring you
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I think that's another thing too, is we, we try and say, well, the data shows this,
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like you, I mean, the data is helpful for a lot of things, but there are times when it's
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For example, there's, you probably heard this before.
00:19:35.420
It's like, oh, people are much happier when they spend money on experiences over things.
00:19:40.800
But what happens if that's only true for like extroverts, let's say, and if extroverts
00:19:44.640
are like, you know, they estimate, you know, extroverts are somewhere between 50 and
00:19:48.420
So if that's true and you ask most people, what are they going to like spending on?
00:19:52.500
And they're going to say extroverts are probably going to say experiences, but what about the
00:19:58.320
They may like things like books or something else, right?
00:20:00.640
I'm just coming up with categories, but you see the point, like data is good.
00:20:03.980
It's useful for like figuring something out and exploring, but you really, at the end
00:20:07.720
of the day, have to define what experiences you want or what things you care about.
00:20:11.380
And if that's like fancy watches or fancy cars or whatever, that's fine.
00:20:14.360
I don't think you should let anyone guilt you for that.
00:20:15.780
If you truly enjoy them, I think it's just about figuring that out.
00:20:19.800
Figuring out what you want, know thyself, right?
00:20:21.460
It is like a, this goes back to like the Greek ages, right?
00:20:24.580
So like figure out, it's important to line up your spending with your psychological profile.
00:20:28.540
I think that was another point you make in that chapter too.
00:20:32.740
Like there's certain people that, you know, this, and we can kind of get into this later,
00:20:36.160
but just like, even with debt, like there's certain people that are so debt averse, they
00:20:38.960
don't want any debt, like not even mortgage debt.
00:20:41.940
And if that's who you are, you just hate the feeling of having debt.
00:20:45.060
Then yeah, you got to make sure that your stuff matches or your spending and your, your financial
00:20:51.460
We're going to take a quick break for your words from our sponsors.
00:20:58.400
So something I think a lot of younger people are worried about today, you know, they're
00:21:02.620
in their twenties or their thirties and they think, man, I've got to save so much for retirement.
00:21:10.760
I might have 30 or 40 years where I'm not working at all.
00:21:16.260
And so I'm afraid I'm not going to have any enough money when I'm old, but you point out
00:21:20.700
data that says, yeah, you're, you're probably going to be okay.
00:21:23.960
You probably don't have to worry so much about it.
00:21:28.420
So the first thing I just want to dispel this myth, everyone thinks that social security
00:21:33.920
And I think there's a lot of people, especially in millennials who believe that we're not
00:21:39.140
And if you actually look at the reports, like social security is definitely not going to
00:21:43.540
It's, I mean, even if the fund, the trust runs out, like future workers paying into the
00:21:48.340
system, we'll be able to pay all benefits to at least 70%.
00:21:53.620
It's the only way to kind of make the system work, but to think you're going to get zero,
00:21:59.400
I just can't imagine that unless like the U S collapses, but in that case, like, you
00:22:02.880
know, who cares about your investment portfolio?
00:22:04.380
Honestly, you're going to need to like figure out a far more, you know, far bigger problems
00:22:10.000
So I think that's the first thing, just social security, some social security will be there.
00:22:14.200
So you really just need to save in excess of whatever your social security income is
00:22:18.420
And right now, like for social security is about $1,500 a month.
00:22:22.760
It's 18 grand a year, but still $1,500 a month, you know, that's not nothing.
00:22:29.360
So then however much you're spending a month, you just need to save for that excess there.
00:22:34.020
And if you look at the data, there's just so much data that like retirees don't spend
00:22:40.560
So like the average inheritance of like someone in their sixties who dies is like 300,000 and
00:22:52.200
Cause I'm like, Oh, you think people are spending down their assets, right?
00:22:57.120
Of course it happens to some people, but most retirees end up dying with some wealth.
00:23:01.180
And so I think that's something to kind of keep in mind there is like people like, Oh,
00:23:06.480
Cause you're not going to, you're not, you won't even let yourself.
00:23:09.560
A lot of people will just end up not selling down their principal.
00:23:12.160
Only one in seven retirees sells down their principal in a given year, which is kind of
00:23:18.000
So if you have a hundred thousand dollar portfolio and it's, let's say it's getting you 10% a year,
00:23:22.600
most will just take that 10,000 plus their social security income and they're good.
00:23:26.180
And they won't even touch the a hundred thousand and it'll just stay there at a hundred every
00:23:31.180
So that's kind of the way to think about it, but that's kind of, you know, what I've seen
00:23:35.400
And that's why I don't think people need to worry as much about how much they're saving
00:23:41.120
So you mentioned, you know, some people, they're just very debt averse, but what does the data
00:23:53.760
I mean, I think the main principle I have around debt is like the people that are best
00:23:57.660
served to use debt are people who don't need it, which is kind of shocking.
00:24:00.540
Like if you think of, I can give some extreme examples, but I think they illustrate the point.
00:24:04.080
You would say like, you know, Elon Musk, you know, at one point was the richest man in
00:24:08.220
I don't check it every day or whatever, but when he's the richest man in the world, why
00:24:12.900
It's like, that seems so crazy as all this money, why would he need to borrow?
00:24:15.620
Well, he just basically, he didn't want to sell his Tesla shares.
00:24:18.640
So he basically used them as collateral and then borrowed from a bank.
00:24:21.620
So in case something happened and he couldn't make a payment on his debt, he could just give
00:24:25.400
them some of his Tesla shares that he had as collateral.
00:24:27.560
So that's an example where he probably got a very, very low interest rate from a bank
00:24:31.160
and he was able to, you know, as a result of that, not sell his Tesla shares, which
00:24:35.280
are likely appreciating faster than his interest rate.
00:24:38.140
And so because of all that type of stuff, he didn't need debt, but he took it and used
00:24:43.260
Like there's a great book out there called the value of debt and building wealth.
00:24:46.500
And that really kind of changed my worldview on looking at debt.
00:24:49.840
Now, of course, there are certain types of debt, which aren't favorable, generally credit
00:24:54.140
I don't agree people should have it, but there are cases where if you're in a jam and you
00:24:58.080
really don't have a lot of cash that maybe you need to use that to like get out of it.
00:25:01.600
But as long as you know, you're, you're going to try and find ways to, you know, increase
00:25:05.060
your income or maybe cut spending to get out of that hole.
00:25:09.940
You know, I don't want people to be spending frivolously, but like there are cases where to be
00:25:15.180
And I give an example in the book of these people who are called borrower savers, for
00:25:19.200
example, they might have a $500 credit card bill and a thousand dollars on their bank account.
00:25:24.980
Nick, why wouldn't they just pay off the $500 and just have $500 in cash right in their
00:25:31.820
Well, the issue is if they do that, they may not have enough liquidity, you know, to take
00:25:38.140
That they need to pay right now, you know, and they can't pay with the credit card, right?
00:25:41.320
So that's an example where someone may have just extra liquidity and they need the liquidity.
00:25:44.540
And so they're using a credit card to pay for that liquidity, so to speak.
00:25:48.340
So overall, I would say, you know, the times you use debt is when you can earn a higher return
00:25:53.360
That's obvious in cases like, you know, if you can business or maybe student loans, depending
00:25:58.800
I think that really matters in terms of how it's going to affect your lifetime earnings.
00:26:01.800
But in addition to that, like mortgage debt, I think is, is most people are okay with it.
00:26:06.760
It doesn't affect them psychologically of all the types of debt out there.
00:26:09.280
That debt really has the lowest psychological is a stress profile.
00:26:13.780
So if you have mortgage debt, most people don't really worry about our stay up and I don't,
00:26:17.040
my gosh, my mortgage, they don't really worry about that.
00:26:18.800
There are some that would, but most people don't.
00:26:27.000
So credit card debt, debt that's owed to like friends and family, things like that,
00:26:31.100
like personal debt that you take from people, you know, because it's harming your social
00:26:35.680
And I think people really are very cognizant of their, you know, their place in the social
00:26:39.300
and, you know, the social hierarchy and all that.
00:26:41.240
So that's the type of debt you want to try to avoid that really does eat people up.
00:26:50.560
I don't know how student loans, I actually don't know the data on student loans in particular,
00:26:53.960
but I just know like financial debt, particularly credit card debt.
00:26:57.000
It does stress people out because the rates are so high, right?
00:27:00.020
And imagine if you take a loan from the mob, that'll also keep you up at night.
00:27:07.880
Well, as you mentioned mortgage, let's talk about the, you know, one of the biggest financial
00:27:10.580
decisions that a lot of people make and that's whether to buy a home or not.
00:27:13.600
And this is another topic in the personal finance world where the debate gets heated.
00:27:21.260
What does the data say about buying or renting?
00:27:24.440
So, I think if this is, I, the, the two topics I dislike writing the most about are this topic
00:27:30.140
here about real estate buying versus renting and taxes.
00:27:33.140
And the reason why is because I'm trying to give general advice for something that's so
00:27:38.340
individual and like specific to a specific region or area or person, right?
00:27:42.700
Like in the case of taxes, if you're single or married, that changes things, right?
00:27:47.820
All sorts of, you know, what, where's your income coming from?
00:27:50.340
That changes how you, what's the optimal decision profile, right?
00:27:52.960
The same thing's true with buying versus renting.
00:27:55.020
So, I do have some general principles I follow, but I think overall, I think it's more of a
00:28:00.240
personal decision and less of a financial decision.
00:28:02.980
And so, I know we want to talk about all the financial levers and all that, but I think
00:28:10.400
And I give, I give three basic like criteria I think you need to hit in order for you to consider
00:28:16.340
And the first one is I think you need to be there for at least 10 years.
00:28:19.920
And the reason I say that is transaction costs tend to be, you know, on average around 6%,
00:28:24.600
including everything, you know, if you have to pay realtor closing costs, any of that type
00:28:28.920
of stuff, when you add all that up, it's usually about 6% of the price of the home.
00:28:33.500
And, you know, the real return on housing since like, I don't know, the early 1900s is something
00:28:39.680
It's been much higher than that recently, but just through, for most of history, you
00:28:44.260
know, homes have gone up by, you know, 0.6% a year.
00:28:50.880
So, if you're there for 10 years, the transaction costs should be negated out on average.
00:28:55.260
The second thing is you need to have a stable personal or professional life.
00:28:59.560
It's really tough to like buy a home as a single person and then, oh, you're going to
00:29:03.380
get married and have kids and the home isn't big enough for that and then you need to sell
00:29:07.840
So, ideally, you want to not pay transaction costs.
00:29:11.520
So, the personal life or professional life, right?
00:29:13.680
You don't want to go and, hey, I just got this really risky job or maybe I'm at a startup
00:29:18.000
and, you know, my incomes are going to be very variable or something.
00:29:21.120
You don't want to take on a bunch of debt where you have to make payments every month
00:29:24.260
and you have no idea what your pay is going to be that month.
00:29:33.060
But I think, you know, what they consider a qualified mortgage is a debt-to-income ratio
00:29:38.620
So, if your monthly debt, let's say you make income of $5,000 a month and your payment,
00:29:44.020
that's gross income, and your payment, your mortgage payment's $2,000 a month, that's 40%,
00:29:53.860
You know, be there 10 years, stable, professional, and personal life, and, you know, you can afford
00:29:58.340
it, which is, that's obviously harder to solve for, but there are ways you can look at that.
00:30:02.840
And I think if those things are there, then you should own over renting.
00:30:05.980
Otherwise, you know, I would say, hey, maybe consider renting a little longer.
00:30:10.820
And I don't know if, tell me about this approach that I've had towards owning a home.
00:30:14.360
I've, so I know a lot of people think about buying a home as an investment.
00:30:17.240
It's like, well, this is going to be a store of wealth.
00:30:19.280
I've never really thought of my home as like part of my store of wealth.
00:30:22.520
Like, I bought a home, I treat it like, you know, I'm buying like a car or something.
00:30:27.360
You know, just, this is, it gives me utility, but there's also like all these, this intangible
00:30:33.160
It's like where I can build a home and make memories for my kids and I can remodel it and
00:30:39.340
I'm never really thinking about, well, you know, when I'm 20 years from now, I'm going
00:30:42.820
to be able to sell this thing and pocket a bunch of change.
00:30:46.720
Should I be thinking of my home as a, as an asset?
00:30:49.140
I mean, I agree with you that like a lot of the home part is the societal thing.
00:30:54.500
It's the personal values and things you care about, which you mentioned here.
00:30:57.920
I would not necessarily consider a home and an investment in a traditional way because
00:31:02.160
it's really like, let's say your home goes up, you know, twice, you know, two X in value,
00:31:09.660
And unless you sell that home and go to a much cheaper area, because think about if your
00:31:13.900
home went up two X, probably every other home in your neighborhood went up two X.
00:31:16.740
I'm assuming you want to live there for some reason, right?
00:31:19.560
Then it's like the only way you can cash out that is if you sell in one place and move
00:31:24.560
That's the only way that it becomes an investment.
00:31:26.760
You kind of can cash out some of that equity, but most people generally live in the same
00:31:34.400
So I don't like thinking about it as an investment.
00:31:36.560
It can be an investment in certain circumstances, but usually it'll just kind of keep pace with
00:31:41.440
So over time it should keep pace with inflation, which means, you know, it's going to be either
00:31:45.260
passed down to someone else and they're going to really enjoy the investment.
00:31:49.340
So it's not really an investment for you, but it could be investment for, you know, the
00:31:53.940
If, you know, when, if you eventually pass, you know, you pass on the home and then they
00:31:57.300
either keep it or sell it or whatever they do with it.
00:31:59.100
So that's where the investment part I think comes in.
00:32:02.320
Well, let's move to, we've talked about saving.
00:32:05.700
We've talked about, you know, more, there's some big personal finance decisions that people
00:32:09.300
have to make, but let's talk about, okay, we're saving our money and we need to
00:32:14.560
You're saying when you're first starting to save slash invest, like you shouldn't spend
00:32:18.420
a lot of time and bandwidth thinking about, well, it's my allocation.
00:32:22.740
He's like, you know, I'm going to maximize this.
00:32:24.320
So what do you recommend for someone who's just starting out?
00:32:26.680
So either it's a guy listening, they're in their twenties, they're just starting to work.
00:32:33.420
So they're not having to actively tinker with it all the time.
00:32:37.000
I think they should just be broadly diversified into income producing assets.
00:32:40.620
And so what does that mean in income producing assets is a very, you know, vague term, but
00:32:45.120
includes things like stocks, bonds, real estate, and there's different ways you can do real
00:32:50.320
estate, whether you're owning an investment property or you're buying real estate through,
00:32:54.160
like, as I mentioned earlier, real estate investment trust, which you can get through
00:32:59.920
I can't mention specific tickers for compliance reasons, but if you search, you know, S&P 500
00:33:04.320
index fund, you know, you can find a very cheap option that will give you broad access
00:33:08.780
to diversified access to the U.S. stock market, right?
00:33:12.340
So I think that's the simplest way you buy those things.
00:33:17.900
You focus, spend more of your time focusing on your career and saving more money.
00:33:21.060
And then as you start to acquire more and more wealth, then you can kind of fine tune
00:33:24.240
and say, Hey, do I really need a, then you can start saying, Hey, do I need something
00:33:29.440
Do I want to have something, you know, and all you can start adding these other things,
00:33:33.180
which may not be income producing, but I think the bulk of your assets should be
00:33:38.500
I'm not against our, I own both of those types, those asset classes, but they represent
00:33:43.380
So I'd have a, about 85 to 90% of my assets are what I would consider income producing
00:33:50.980
And the other 10% are things like that aren't income producing, which is crypto art.
00:33:55.460
And I think a handful, I would also, I have some private investments in companies, but
00:33:58.860
I consider those because they're like, I'm like seed angel round.
00:34:02.080
I don't even consider those as income producing.
00:34:04.120
So I consider them as like kind of like a lottery ticket type thing.
00:34:06.560
So that's also in the non-income producing asset, but could become income producing one
00:34:11.080
So someone who's just starting, yeah, go just, you can just do some research, find like,
00:34:19.080
There's not, there's not a better, I mean, it's, they're so cheap and they just, they work
00:34:22.860
really well and they need to build wealth over time.
00:34:25.500
I think most of the major, um, investment firms like they have, they, they offer some
00:34:32.500
And then once you are getting that going, then you can do, you know, use a small percentage
00:34:36.600
of your savings for that fun stuff, cryptocurrency art, et cetera.
00:34:45.080
And this is the idea that you should just constantly keep buying and investing in the
00:34:50.180
market, you know, putting your money in income producing assets.
00:34:53.000
When I first saw the idea of just keep buying, I instantly thought of dollar cost averaging
00:34:57.420
for those who aren't familiar with dollar cost averaging.
00:35:00.460
Can you explain like sort of the common conception of dollar cost averaging?
00:35:04.360
And then I guess maybe how is just keep buying similar and different from that common conception?
00:35:10.940
So just keep buying is basically dollar cost averaging.
00:35:14.100
It just has the psychological motivation built in.
00:35:16.640
And it's also, it's, to be honest, it's catchier.
00:35:20.800
It's been there for a while, but just keep buying is just a catchier phrase.
00:35:25.240
But I think one of the issues with the term dollar cost averaging is there's actually two
00:35:30.920
So my understanding is the original definition, which I think got popularized by Ben Graham,
00:35:35.640
you know, Ben Graham, who did securities analysis, was like the mentor to Warren Buffett.
00:35:39.440
He said like dollar cost averaging is when you're just buying over time, right?
00:35:42.920
Like, so if you have a 401k, every two weeks you get paid, you're buying, you know, you're
00:35:47.260
taking some money, you're buying into the market or whatever you're buying, whatever
00:35:49.700
basket of assets you're buying into, you're buying them over time, right?
00:35:52.620
That's the original definition of dollar cost averaging.
00:35:55.840
At some point, the second definition came up, which is imagine, you know, you sold a business
00:36:06.700
Instead of putting that all into the market now, which people call a lump sum investment,
00:36:09.900
they say, oh, you should dollar cost average that investment and slowly average into the
00:36:16.180
I do not like that definition because think about it.
00:36:18.380
It actually means the opposite of the first definition.
00:36:21.380
The first definition of dollar cost averaging means investing as soon as you can with whatever
00:36:27.480
The second definition, which is like averaging in slowly into the market with like a large amount
00:36:32.660
That's the exact opposite of the other definition.
00:36:35.180
So I think this is so confusing because you have the same phrase being used for two different
00:36:41.340
And I've been on the war path to try and fix this for a long time, trying to tell people
00:36:45.180
to stop using the second definition because that's kind of a more, you know, that's a newer
00:36:53.900
So basically, long story short, the good dollar cost averaging, just keep buying.
00:37:00.840
The bad version is the one that slowly averages into the market over time because it's suboptimal.
00:37:05.580
I show in the book why investing now is far better than averaging in this, I call it.
00:37:09.380
So that's what I would say in terms of understanding dollar cost averaging, the confusion that you'll
00:37:14.980
hear when you read, you know, you might read a post that says lump sum versus dollar cost
00:37:20.540
That's not the definition that I'm using in the, which is, I think, true to history and
00:37:24.260
true to how it was invented or popularized at least.
00:37:28.240
I mean, I know you can get in the weeds with this stuff because I thought that was interesting
00:37:30.980
because I've, when I've read about dollar cost averaging, I've always seen that second
00:37:36.100
Well, if you have, let's say you have a hundred thousand dollars to invest, you inherited
00:37:40.420
Well, instead of investing it all at once, you want to break that up throughout the year
00:37:44.280
because, you know, one month the market might be up and then another month market might
00:37:50.020
And so overall, like you, you get your money in at different times.
00:37:53.260
And so it will, you know, even out, average out, right?
00:37:56.200
But with lump sum investing, it's like, well, if you invest your money when the market's
00:38:03.400
That's, I mean, I think that's what people think with dollar cost averaging.
00:38:05.940
So why is the, that second approach, dollar cost averaging suboptimal from the lump sum
00:38:12.980
So it's suboptimal because the market tends to go up over time.
00:38:16.720
And so I actually show in the book, I go through every, I go through a bunch of different
00:38:23.040
I do gold, I do international stocks, I do Bitcoin.
00:38:25.680
And I show that if you were to average in, which is the second definition for dollar cost
00:38:30.080
averaging, that underperforms a, you know, buying now, which is putting all the money
00:38:35.920
80% of the time and the average underperformance for every asset class, it varies, but for the
00:38:41.720
So let's say, Brett, you and I got paid $100,000 at the beginning of this year and I put all the
00:38:49.900
Now in 2022, you would have been better off because putting in January, the market obviously
00:38:54.580
And so you would have been better off in that year.
00:38:56.860
But now what if we'd done that in 2021 or 2020 or 2019 or 2018?
00:39:01.460
And every single year before that, basically anyone who put all the money at the beginning
00:39:06.960
And so if you actually run that throughout history, run this experiment across every year
00:39:10.280
in history, 80% of the time you're better off by investing now.
00:39:15.740
The reason you invest is because you want these assets to appreciate and go up, right?
00:39:21.940
It seems so silly to me to think like, oh, I'm investing because I want this money to
00:39:26.140
grow, but I'm also slowly investing because I think it's going to crash.
00:39:31.880
Like the premise of investing is you think the market's going to go up and it generally
00:39:35.300
And so because of that increase, you're generally better off putting the money in now.
00:39:39.860
Now, of course, in the small cases, in a handful of cases, you know, 20% of the time
00:39:44.000
when the market declines, you know, right after you put it in, that's unfortunate.
00:39:48.340
But there's also, you know, a psychological component here, which is like the only time
00:39:52.580
when averaging in or this second form of dollar cost averaging outperforms lump sum is when
00:40:00.000
And that's the exact time when you're least enthusiastic to put money to work, right?
00:40:04.180
So imagine, you know, let's go back to February 2020, market's starting to crash.
00:40:11.580
But someone else would have said, hey, I'm going to start putting it in.
00:40:20.220
I'm going to wait until the dust settles, right?
00:40:22.400
Next thing you know, the market within six months, the market's back at all time highs.
00:40:25.760
So it's one of those things where it's very easy to say this in a vacuum.
00:40:29.440
But the only time that averaging in beats like a lump sum investment is when the market's
00:40:34.720
And that's the time when you're not going to want to do it.
00:40:38.000
So I just don't, I don't think the data is there.
00:40:40.080
And I don't think the psychological motivation is there either.
00:40:42.160
So I say just lump sum and, and, you know, let the chips fall where they may.
00:40:46.300
And I think some people might think, well, I'm going to lump sum, but I'm going to wait
00:40:54.300
With most income producing assets, it's a fool's game because they tend to, it's the
00:41:01.060
Um, so the issue is when you wait to buy a dip, you're like, Hey, I'm going to wait
00:41:06.040
By the time that dip comes, the dip value is usually higher than where you could have originally
00:41:12.280
I remember I wrote, I actually wrote the blog post called just keep buying back in April,
00:41:21.200
Anyways, I wrote this post and people were like, Oh, the markets are too expensive.
00:41:24.520
Back in April, you know, 2017, people were saying markets are too expensive.
00:41:35.960
But even if they had bought on the exact bottom, which of course is impossible to time, but
00:41:39.940
let's say they actually, they bought on the exact day of the bottom.
00:41:42.600
They still would have bought prices that were 7% higher than if they had just bought back
00:41:49.140
So it's a perfect example showing you like, you're, you think you're a genius.
00:41:54.980
But like, you don't see all the mistakes you made by not buying previously.
00:42:01.380
I literally took the bottom, which is like impossible all the time, but let's say you
00:42:05.160
And I took this period, you know, three or four years prior.
00:42:08.240
And I show like, even if you had done that, you've been better off just buying over time.
00:42:11.840
So that's why buying the dips, uh, fool's errand.
00:42:14.360
Cause most of the time the dip is still higher than where you could have bought originally.
00:42:17.460
Most of the time, of course there are exceptions to this rule.
00:42:19.620
Like great depression is a great example, but it just, those big dips are rare.
00:42:29.020
Only time by the dip works is when you get really lucky.
00:42:35.640
So, I mean, right now I'm feeling confused about like what to do, like, you know, what's
00:42:41.340
Like there's inflation and then like the market's volatile.
00:42:43.780
And then like, you know, people might be like, should I buy a house now?
00:42:47.000
Because, you know, prices are expensive, but I've heard they're crashing.
00:42:50.360
And so you hear all these contradictory advice on how to manage your money in this situation.
00:42:57.040
Like for someone who's like confused, they're reading all this stuff.
00:42:59.540
Like, man, what do I, should I spend my money now?
00:43:01.800
Because inflation might decrease the value of the money in my bank account.
00:43:05.520
Any advice for people who are feeling confused about what to do with their money in our current
00:43:10.100
I mean, there's this great phrase that goes, you know, history doesn't always repeat, but
00:43:14.840
I think by, you know, understanding that this kind of stuff has happened before.
00:43:18.800
I mean, I think the 70s is a great example of this.
00:43:20.860
It's not exactly the same, but it's very similar.
00:43:23.280
And just understanding that like we've kind of gone through these types of periods before
00:43:27.160
and we're going to get through it and things will return to some normal, maybe not
00:43:31.620
exactly 2% inflation in what we had in the 2010s, but maybe, you know, a lower inflation
00:43:41.320
It may take multiple decades, but these type of things will happen and they'll pass.
00:43:44.780
So I think the thing to realize is just like the more history, you know, the more comfortable
00:43:48.540
you feel with what happens in the present, because these types of things, as I said, you
00:43:52.200
know, they, you know, they don't repeat, but they rhyme in a lot of ways.
00:43:55.640
And so you'll see people tend to, you know, human behavior hasn't changed that much, even
00:43:58.940
though, you know, all the inputs are changing, human behavior is pretty stable.
00:44:01.820
So how people react to things has been stable over time.
00:44:04.540
So I would say, you know, keep doing what you're doing, obviously, assuming, you know,
00:44:07.760
you're saving money, you're investing all that type of stuff and stay the course, right?
00:44:12.080
You don't want to start panicking, making a bunch of changes here and, you know, cause
00:44:17.260
And then if you're not where you want to be, find ways to say, okay, what can I do over
00:44:21.160
the next year, three years, five years, 10 years to kind of start moving in that
00:44:25.160
And thinking about planning that out, you know, and that's, it's not easy to do.
00:44:32.120
Just, you know, do what you can and see what happens.
00:44:35.240
Well, Nick, this has been a great conversation.
00:44:36.620
Where can people go to learn more about the book and your work?
00:44:44.140
And also if you want to DM me on Twitter, my handle is at dollarsanddata, all lowercase.
00:44:52.680
So feel free to send one if you have any questions or anything like that.
00:45:03.320
It's available on amazon.com and bookstores everywhere.
00:45:05.580
You can find more information about his work at his website of dollarsanddata.com.
00:45:09.400
Also check out our show notes at aom.is slash finance answers.
00:45:14.740
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00:45:24.620
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00:45:28.380
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