The Art of Manliness - How to Eliminate the Two Biggest Sources of Financial Stress

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

00:00:11.720 There are different philosophies one can have when it comes to money.

00:00:15.140 Jared Dillians is built around eliminating as much anxiety around it as possible,

00:00:18.900 so you hardly think about money at all. Jared is a former trader for Lehman Brothers,

00:00:23.560 the editor of the Daily Dirtknapp, a market newsletter for investment professionals,

00:00:27.200 and the author of No Worries, How to Live a Stress-Free Financial Life.

00:00:32.640 Today on the show, Jared talks about the two biggest sources of financial stress,

00:00:36.340 debt and risk, and how you can eliminate the stress they can cause. We discuss how three

00:00:40.960 big financial decisions, buying a car, buying a house, and managing student loans,

00:00:45.920 ultimately determine your financial health and how to approach each of them in a stress-eliminating

00:00:50.280 way. We also talk about how to minimize risk by creating what he calls an awesome portfolio,

00:00:54.980 a mix of assets that has nearly the return of the stock market with half its risk,

00:00:59.720 and Jared shares whether cryptocurrency fits into his No Worries financial philosophy.

00:01:04.460 After the show's over, check out our show notes at awim.is slash no worries.

00:01:15.800 All right, Jared Dillian, welcome to the show.

00:01:22.520 Thanks. Thanks for having me.

00:01:23.660 So you write about investing in personal finance, but you started off your career

00:01:28.400 in the military, specifically the Coast Guard. How did you go from serving in the Coast Guard to

00:01:34.600 working for Lehman Brothers and then writing about investing?

00:01:39.620 Well, so when I graduated from college, I graduated from the Coast Guard Academy.

00:01:43.880 I was stationed on a Coast Guard cutter out of Washington State, and I knew within about a year

00:01:49.500 that it wasn't for me. And what I was really interested in was writing. There was one bookstore

00:01:55.480 in town. I was reading a bunch of literary magazines. I wanted to get my MFA and teach writing and write

00:02:03.320 short stories. So that was my plan. And I called up my mom and I said, Mom, I have a plan. I'm going to

00:02:09.280 be a writer. And she said, that is the dumbest idea I have ever heard. So she recommended that I make 1.00

00:02:17.060 some money first. So I also was interested in finance. And I started really getting interested

00:02:23.780 in finance around age 23. And I applied to business school. I went and got my MBA at the

00:02:30.560 University of San Francisco. My first job in the markets was on the floor of the Peacoast Options

00:02:35.780 Exchange in San Francisco. And I went from there to Lehman. I was head of the ETF trading desk at

00:02:42.460 Lehman. And then ultimately, I came full circle. I started writing a financial newsletter. And I

00:02:48.400 published my first book in 2011. Okay, I love it. So mom said that's a bad idea. But then you found out

00:02:56.120 a way to show up mom. That was a great idea, mom. And I actually ended up getting my MFA last year

00:03:02.020 at the age of 49. And it's funny how you got that job. You talk about it in your book. We're going to

00:03:07.800 talk about it today. The book is called No Worries. The job at Lehman. You just kind of showed up for

00:03:12.780 that. It happened kind of by accident, but kind of not. Well, I mean, I was interviewing at pretty much

00:03:19.300 all the banks. Lehman had a culture that I fit in with pretty well. You know, to say they were

00:03:26.300 entrepreneurial would be an understatement. It was very scrappy sort of culture. And this idea that

00:03:32.700 you would have this working class kid from the military that was smart and fast and motivated,

00:03:39.120 I fit in perfectly at Lehman Brothers. It was the best place for me. And it was a great place to work.

00:03:44.040 I mean, you know, the name Lehman is kind of odious because of what happened in the financial

00:03:48.620 crisis. But I can tell you that the people I worked with was phenomenal. And it was just it was a great

00:03:55.240 place to be. So in your new book, No Worries, this is a general personal finance book. You talk about

00:04:02.460 investing, but it's just about finances in general, specifically how not to be stressed out about your

00:04:08.820 money. I'm curious, was there a time in your life when you were under financial stress?

00:04:14.940 There's really only been two times. And one of them was that when Lehman went bankrupt,

00:04:20.240 you know, I had a lot of company stock that got vaporized, went to zero, lost about a half a million

00:04:25.720 bucks with that. And also, you know, I was invested in the market and the market went down. So I got cut

00:04:31.820 in half in the financial crisis, which wasn't catastrophic, but it did cause me a lot of stress.

00:04:36.660 And there was another time in 2017, you know, I still trade, I invest for myself. And I got, I got

00:04:44.100 myself in this trade, betting that Canadian interest rates would go down. And I was so confident that I

00:04:52.560 put on this trade and just massive size. And then it went the other way. So pretty much for all of 2017, I was

00:05:01.820 miserable. I was absolutely miserable. So really what I talk about in the book is the idea that

00:05:08.060 there's two sources of financial stress. One is debt and the other is risk. And I've never really

00:05:14.780 had any debt stress. I've always been very averse to debt, but I have had risk stress at a couple

00:05:20.680 points in my life. What's life like when you're under financial stress?

00:05:27.240 It's, you know, financial stress is one of these things that is avoidable. There's very few natural

00:05:35.480 disasters. And the problem with financial stress is that it compounds other kinds of stress. So if you

00:05:42.980 have marriage stress, if you have kids stress, if you have work stress, and then you throw financial

00:05:48.020 stress on top of it, it makes everything worse. And during those periods of time, when I was

00:05:54.820 experiencing financial stress, it consumed my thoughts. It was all I could think about. It was

00:06:01.460 the first thing I thought about when I woke up in the morning. The last thing I thought about when I

00:06:05.660 went to bed, it made me grumpy. It made me irritable. It made me difficult to be around. You know,

00:06:11.700 those are the types of things that happen when you have financial stress.

00:06:14.780 And it's the opposite of financial stress. You're just not even thinking about money at all.

00:06:19.520 That is the opposite. And the goal really is to just not think about money ever, like ever. Like

00:06:27.760 if you go out to lunch and it costs 25 bucks, you put down your credit card and you don't think about

00:06:32.400 it. And it doesn't turn into this huge decision. Like at every point in your life, you just don't

00:06:39.880 think about money. And it is the best place to be. So you mentioned the two sources of financial

00:06:45.680 stress are debt and risk. And we're going to talk more about these here in our conversation.

00:06:50.380 But why isn't not having enough money a source of financial stress? I mean, I imagine for some

00:06:55.740 people who might be listening, they think, boy, I'm pretty stressed out. I've got this car repair I

00:07:00.520 need to do. And if I don't get this done, then I can't get to my job, but I don't have the money.

00:07:04.380 Why don't you think that's a source of financial stress?

00:07:07.720 Well, one of the things I talk about in the book is this idea of an emergency fund. And

00:07:13.660 about half the country doesn't have what I would call an emergency fund. And anybody of

00:07:18.980 any income level can have an emergency fund. You save a couple hundred bucks a month. You

00:07:23.680 do this over a period of a few years. You have an emergency fund. And the check engine light

00:07:29.180 is no longer a crisis. Your cat getting sick is no longer a crisis. So in my experience,

00:07:37.940 I've known a lot of people who are very limited means. As long as their basic needs are met,

00:07:44.760 and that's a big caveat, as long as their basic needs are met, if they don't have debt and they

00:07:50.740 don't have risk, even if they're living paycheck to paycheck, they're perfectly happy. And maybe you

00:07:58.180 lose your job and then you have your unemployment for a while, but it's not catastrophic. It's not

00:08:03.440 the end of the world. You have an emergency fund. Like people with not a lot of money can live without

00:08:08.560 financial stress. On the other hand, you have Elon Musk, the richest guy in the world, who puts himself

00:08:15.580 under massive amounts of financial stress. So he got a big loan to buy Twitter and he pledged his

00:08:23.040 Tesla stock is collateral and Tesla went down 75%. And he almost like Elon Musk was close to going

00:08:31.140 bankrupt, the richest guy in the world. And like I said, it's all man-made. This is a position that

00:08:36.440 he put himself in. So the richest guy in the world can have lots of financial stress and people with

00:08:42.500 no money can have no financial stress. It's not dependent at all on how much you make.

00:08:47.680 Okay. So you can avoid some of the maybe potential stress from unexpected costs by having a financial

00:08:54.860 emergency fund. But then you also talk about in the book, we'll talk about this too later on,

00:08:58.760 also just increase your revenue, the amount of money coming into your life. And we'll talk about

00:09:03.200 some ways that you can do that. But let's talk about, let's go back to these two stressors,

00:09:07.460 these two big ones, debt and risk. Let's talk about debt. Why is, I mean, you kind of mentioned

00:09:13.100 with Elon Musk, like how else can debt be a source of financial stress? Is it just that

00:09:18.080 constant knowing that there's a bill that that's coming up and that bill can get bigger and bigger

00:09:22.960 if you don't pay it down? Yeah, that's, that's exactly right. You know, look like there are people

00:09:28.580 out there like Dave Ramsey who say that you should never have any debt ever and you should avoid it at

00:09:34.640 all costs. It's hard to do. It's hard to live a life without debt. It's almost impossible to buy a house

00:09:40.600 without debt. 90% of people finance cars, only 10% of people pay cash for cars. And unless you go to a

00:09:48.700 community college or a very cheap school, it's tough to go to college without debt. So at some point in

00:09:53.500 your life, you're going to have debt. It's really about how you manage it. But that stress, you know,

00:09:59.440 like even for me, like a mortgage is a very, I don't want to say safe form of debt, but it's lower risk

00:10:06.920 than other forms of debt. But even a mortgage can cause stress. And if you have a mortgage on your

00:10:12.460 house, guess what? You don't really own your house. The bank owns your house. This happened to me

00:10:19.220 about seven or eight years ago. I had a car, I bought a Toyota Highlander and I got a car loan

00:10:25.400 from USAA and it was a five-year car loan. And once I got done paying it off, I got this envelope in the

00:10:32.940 mail from USAA. And I opened it up and it was my title. And I said to my wife, I was like,

00:10:38.060 why did they send, why do I have my title in the mail? And she said, well, the bank has it as long

00:10:43.120 as you have a loan. And it occurred to me, if you have debt on a piece of property, you don't really

00:10:49.420 own it, you know? So, you know, you should pay down your mortgage as quickly as possible because

00:10:55.720 there is nothing better than owning a house free and clear where there is no encumbrance at all.

00:11:03.340 Either the bank does not own it, you own it. And no matter what happens to you, whether you get sick

00:11:09.560 or you get an injury or get laid off from work or something terrible happens, they cannot take the

00:11:14.800 house away from you. They cannot take the car away from you. You don't have debt on something,

00:11:20.240 you own it, not the bank. Well, that, okay, that idea of paying off your mortgage as quickly as

00:11:26.600 possible, that's a hot take in personal finance world because you'll have people who argue, well,

00:11:31.720 that's a dumb move because your home loan might be a low interest rate. You know, if you got it,

00:11:37.520 you know, 10 years ago, 3%, 3.5%, they would say you'd be better off instead of paying off that,

00:11:43.940 that loan, that mortgage, investing that because the return rate in the stock market is like seven or 8%.

00:11:49.980 Why don't you buy that argument? So this is the number one question I get. I get this question

00:11:54.600 all the time. And really it's, it's, it's a decision theory problem. So if you pay down a 4%

00:12:01.420 mortgage, you earn a certain 4%. It's like making 4%. If you invest in the stock market, you earn an

00:12:09.340 uncertain 9%, right? So do you want to earn a certain 4% or an uncertain 9%? And you know, the 9% return,

00:12:19.480 you can have big up years, you can have big down years. In the down years, you're going to have

00:12:24.420 losses and you're going to have debt. The point is that is the path that contributes to the most

00:12:31.840 financial stress. And let's say, you know, once every 30 or 40 years, we have one of these bear

00:12:37.480 markets where the stock market is down 50%, like that is going to cause you a massive amount of stress.

00:12:44.200 The other thing I would add is, you know, I don't really look at things in terms of interest rates.

00:12:50.660 I look at things in terms of dollars paid in interest. So the house that I'm living in now,

00:12:57.020 I bought in 2015. I paid it off in 2018. Over the first three and a half years of the mortgage,

00:13:05.020 I added up all the interest I paid. I paid $70,000 in interest over the first three years of the

00:13:12.460 mortgage. And as you know, all the interest is front loaded. So I'm thinking to myself,

00:13:17.080 $70,000 is a lot of money. What could I have done with that money other than paying interest?

00:13:23.700 I could have taken vacations. I could have done something else. Who knows? But I paid $70,000

00:13:30.360 in interest. So, you know, if you look at a car loan, that is a super long-term car loan,

00:13:37.880 like an 84, 96-month car loan, then you are going to pay on a $60,000 car, you are going to pay $30,000

00:13:46.300 or $40,000 in interest over the life of the loan. Interest rate doesn't matter.

00:13:52.260 That puts things in perspective. Speaking of home mortgages, do you have any advice on

00:13:57.620 structuring a mortgage? Is there an ideal mortgage you should get? And then with the paying it down

00:14:02.280 quickly, are there some mortgages or some banks that penalize you for paying down early? Or is

00:14:08.640 there certain ways to do that so you don't get hit with any fees that you might not know about?

00:14:13.360 Well, first of all, in terms of buying a house, the US is the best country in the world because we

00:14:18.460 have fixed rate mortgages for the most part. You can get an adjustable rate mortgage and those make

00:14:23.220 sense sometimes. But in most places in the world, mortgage rates float, especially in Canada. And

00:14:30.080 they're dealing with this right now. Interest rates went up a lot. Houses were already very expensive

00:14:34.220 and Canada is suffering right now because of interest rates going up. So we have fixed mortgage

00:14:40.640 rates here in the US. You can get a 15-year mortgage or a 30-year mortgage. 15-year mortgages

00:14:46.900 are generally better. The payments are bigger, right? So you have to be able to afford the cash flow

00:14:54.160 on the payment, but you're paying a lot less in interest and you're going to own the house a lot

00:15:01.260 quicker. But if you want to get a 30-year mortgage, what I say is that you should be able to afford

00:15:07.940 a 15-year mortgage and you can still get a 30-year mortgage. So you should at least be able to afford

00:15:14.880 the 15-year mortgage. If you can, it means you're buying too expensive of a house. And in terms of

00:15:20.700 prepayment penalties, prepayment penalties are very rare in the United States. Most conforming

00:15:26.920 mortgages don't have them. You know, what I tell people is review the loan documents before you sign

00:15:32.540 them. Ask the banker straight up, are there any prepayment penalties? Prepayment penalties only

00:15:38.920 exist on about 2% of mortgages in the United States. What about down payment? Is there an ideal

00:15:45.400 number or percentage you recommend people having for a down payment on a home? Well, you should never put

00:15:50.340 down less than 20% and ideally you should put down as much as possible. You should put down as much as

00:15:56.360 possible. Having lots of equity is a good thing. In the mortgage interest, mortgage industry, they have

00:16:03.200 this concept known as LTV. An LTV is loan to value. So if you put down a 20% down payment, you have an 80 LTV.

00:16:13.040 If you put down a 35% down payment, you have a 65 LTV. The higher the LTV is, the more likely that

00:16:23.480 mortgage is going to default. Because if you don't have a lot of equity in the house and something

00:16:28.660 goes wrong and you can't pay the mortgage, you'll just walk away. But if you have a lot of equity in

00:16:34.060 that house, you are going to stay and find a way to keep paying that mortgage so your equity isn't

00:16:39.800 stranded. All right. That makes sense. Another thing you recommend people do in order to reduce

00:16:45.940 the potential stress of debt that comes with owning a home is not treating your home like an investment.

00:16:54.000 How can that help? Well, it's funny. I'm in the process of selling my house right now and I'm closing

00:17:02.300 in May. We have sort of an extended closing. And I own this house from 2015 to 2024 during a period of

00:17:13.380 time when house prices went up a lot. So you would think I would get rich off this house, but I really

00:17:19.480 didn't. I put a lot of money into it in terms of maintenance. I replaced the roof. I replaced the

00:17:24.460 air conditioner. I replaced all this stuff, painted the house, power washed it. We sunk a lot of money

00:17:30.820 into the house. And then at the same time, we're going to have to pay 6% real estate commissions

00:17:37.420 on the way out, which is going to be a lot of money. So what I'm going to have left over is really

00:17:43.240 not that impressive. A house is what you call a negative carry asset. A positive carry asset is

00:17:50.880 like a stock or a bond. It's a stock that pays dividends. It's a bond that pays interest. You're

00:17:56.280 actually getting money. But a house is negative carry. You're paying interest. You're paying

00:18:01.320 property taxes. You're paying HOA fees. You're paying insurance. You're paying maintenance.

00:18:07.820 It's not a great investment. But what I will say is houses are often the best investment for people

00:18:16.760 because it is the only investment where they don't check the price of it every day. Like if you have a

00:18:24.400 stock, let's say you own Google and Google's going up and down and up and down, you're watching it.

00:18:29.560 And eventually you're going to get spooked out of the stock and you're going to sell it and you're

00:18:33.200 going to stop compounding and it's going to continue to go up. A house, you don't have the price of it

00:18:38.920 on your phone. You can't check it. You're going to live in the house for 10 years. So you're just

00:18:44.180 going to forget about what it's worth and it's going to continue to appreciate without you looking at

00:18:49.960 it. And that's why a house is not an investment. But for some people, because they can't sell it,

00:18:56.740 it is actually the best investment.

00:18:59.240 And I imagine there's a lot of people who got in trouble in the past 15 years treating homes like

00:19:05.160 an investment because they thought, well, I can buy this house thinking that it will go up in value.

00:19:11.240 And then there's a bust. And then they're like, okay, actually I'm underwater now. And if they just

00:19:15.780 thought of their home as just an asset that they used, they wouldn't have had that issue because

00:19:19.040 they would have probably spent less on a home. Yeah. I mean, houses depreciate. You have to put

00:19:23.800 a lot of money into them. We kind of have a culture of real estate speculation in this country.

00:19:30.440 And what's interesting is, you know, the financial crisis killed it for seven or eight years and then

00:19:35.580 it kind of came back. But yeah, a lot of people, you know, buy houses to speculate and it's not really

00:19:41.420 a good idea. We're going to take a quick break for your words from our sponsors.

00:19:49.040 And now back to the show. So you mentioned another big purchase that often requires a loan,

00:19:55.000 cars. Any ways that people mess up car buying that causes financial stress due to debt?

00:20:01.620 Well, the way people get in trouble with cars is they put way too much emphasis on what brand of

00:20:09.740 car they're buying, how that fits into their identity. You know, they think of themselves as

00:20:14.840 somebody that drives a BMW or a Mercedes or something like that. It doesn't really matter.

00:20:20.400 So the capacity utilization of a car is 4%, okay? Which means that if you had four people in the car

00:20:29.440 driving 24 hours a day, it would be 100%. But you have one person in the car, you drive it a half hour

00:20:35.440 to work, it sits in the parking lot, you drive it a half hour home by yourself, it sits in your driveway,

00:20:41.420 you're only using it 4% of the time. It just does not matter. It just does not matter. It's a way to

00:20:47.620 get from A to B, right? So in the book, you know, I talk about, yes, you could buy a used car, but that's

00:20:53.320 harder nowadays, because used car prices have gone up a lot. And also, you're kind of tempting fate with

00:21:00.980 maintenance issues and stuff like that. So I'm not really a big fan of buying cheap used cars.

00:21:06.260 I like buying new cars that are cheap, that will last forever. So Toyotas in particular,

00:21:14.200 I have owned Toyotas my entire life going back to 1995. I've owned like five different cars.

00:21:20.220 They're cheap, they last forever, they don't have maintenance issues. I have never had one not start

00:21:25.680 unless I ran the battery down, and they're terrific cars.

00:21:29.780 And then you also in the book, you have like a step by step guide for buying a car.

00:21:34.100 This can be really useful, especially if someone hasn't gone through the car buying process,

00:21:37.780 it can be intimidating, because there is this asymmetry of information, right? You're going

00:21:43.180 in, you might not know anything about the price of the car, the finances involved in the car,

00:21:47.900 the salesperson does, and they do that, that schtick where they're like, well, I got to go talk to

00:21:51.300 the guy up in the booth. And, you know, it creates more intimidation, but you offer some guidance on how to,

00:21:57.340 how to manage that. Any, any big takeaways from that and how to manage that negotiation process?

00:22:02.560 Well, at a minimum, you need to do 10 minutes worth of homework. You need to know what your

00:22:07.160 trade-in is worth, which you can look up in a second on Google. And you need to know what the

00:22:12.900 new car is worth. So if your trade-in is worth $11,000 and the new car is $40,000, then you're

00:22:19.780 going to have to write a check for $29,000. And if you go in there and you're talking to the

00:22:25.360 salesperson and they give you some number that just doesn't make sense, then you have to start

00:22:30.080 asking questions, you know, but like you said, there's asymmetric information. They have information

00:22:36.200 on incentives. They have information on maintenance packages. They're going to try to extract as much

00:22:41.760 value as possible out of you. And you don't really know how to handle that. But like I said,

00:22:49.040 the minimum amount of research you need to do is on the value of your trade-in and the value of the

00:22:53.440 new car. And also you recommend people when they are buying a car to not only consider the price

00:22:59.240 that you're paying for that car to acquire it, but also like a home, you have to take into account

00:23:04.000 there's other costs that go into owning a car, maintenance, potential accidents, insurance,

00:23:09.400 et cetera. And you need to include that in how you think of how much a car costs.

00:23:13.260 Yeah. And what I say in the book is that you should spend no more than 10% of your income

00:23:18.800 on transportation. And that includes gas, which for most people is about $3,000 a year.

00:23:25.960 That includes insurance, which is maybe about $1,500 a year, but it also includes depreciation.

00:23:32.420 So if you have a $40,000 car, you can depreciate it over 10 years, $4,000 a year. So you're going to

00:23:39.380 have $4,000 in depreciation per year, plus $3,000 plus $1,500 is $8,500 a year, which is what you're going

00:23:48.480 to be spending on your car, which means in order to own that car, you need to be making $85,000 a

00:23:54.420 year. So 10% of your income is spent on transportation. Another big purchase that people

00:24:01.060 will make during their lifetime that you probably have to take out debt for is college education.

00:24:06.680 Anything that people can do to reduce the stress of debt that comes from getting a college education?

00:24:12.360 Well, you know, college education, college financing is, it's really terrible what's happened.

00:24:19.940 So basically the biggest problem that we have today is that there was a law signed in 2009,

00:24:26.480 which allowed something called income-based repayment plans. So let's say you spent $100,000

00:24:33.460 going to school, you borrowed $100,000 and your payment would ordinarily be $1,200 a month.

00:24:40.300 But what the government does is they say, look, like you're making $45,000 a year. So we're going

00:24:46.040 to means test this and you only have to pay $300,000 a month. And a lot of people say, cool,

00:24:52.060 my loan payments are only $300,000 a month. But the problem is, is that you're not paying the full

00:24:58.460 payment and the part that you're not paying is being added onto the back of the loan. So I'm sure

00:25:05.180 you've had this experience online or on Twitter or something where you see somebody complaining

00:25:09.980 about their student loans. And they say, I started out with $70,000 in loans and 15 years later,

00:25:16.440 I have a hundred thousand and this is terrible. So what's going on here is that they signed up for

00:25:23.340 an income-based repayment plan. They're not paying the full amount and the amount of the loan is

00:25:28.600 growing over time. So if you are under an income-based repayment plan, you have to pay more.

00:25:34.540 You have to aggressively pay down the loan. So even if you only owe $300,000 a month,

00:25:40.000 that's a check you have to write. You need to be paying $600,000 a month or $800,000 a month

00:25:44.560 just to pay that loan balance down. So the takeaway there, pay down your loans as quickly as possible.

00:25:51.640 And you got to remember too, if you're on one of those income-driven repayment plans for your

00:25:55.940 student loans, you may not only not be paying down the principal, you may not even be paying off the

00:26:03.160 interest on your loan each month or the full interest. So the interest just keeps accruing,

00:26:07.460 your debt will keep growing even though you're making monthly payments. And the thing about

00:26:11.680 student loan debt, you can't discharge it in bankruptcy. You're stuck with it until you're

00:26:16.280 dead. Yeah. I mean, the goal should really be to pay it off in five years. And you have to think 0.92

00:26:21.860 about this before you go to college. You have to know what you're going to spend and you should have

00:26:26.240 some idea of what you're going to make when you graduate. And if you can't pay it off in five years,

00:26:31.160 then you need to go to a cheaper school. Okay. So the big takeaway for reducing the

00:26:36.120 stress of debt, you have to take on debt. There's purchases in life you can't make without debt. It's

00:26:40.560 pretty much impossible to do, but take on as little as you can and then pay it down as quickly as

00:26:46.020 possible. Would that be kind of the two big principles? That's exactly right. Yeah.

00:26:51.100 But the thing is when people hear that, they think, okay, I got to aggressively pay down my debt.

00:26:55.600 In order to do that, I got to get really frugal. I got to scrimp and, you know,

00:27:00.340 eat beans and rice. But in the book, you talk about this whole idea of being hyper frugal,

00:27:06.600 extremely frugal in order to reduce financial stress actually just makes you more financially

00:27:13.000 stressed. How so? Well, what we have in the United States is we have big personal finance. We have a

00:27:21.200 personal finance industry. Okay. Whether it's Dave Ramsey or Susie Orman or whoever else,

00:27:28.080 the millionaire next door book, all this stuff, we are taught that the path to wealth is through

00:27:36.200 cutting expenses, right? Like if you live in a 1200 square foot house, if you have one $99 suit,

00:27:44.700 if you buy a 14 year old Chrysler Sebring that smells like cigarette smoke, if you do these things and you

00:27:52.600 live this life of austerity, then you can get to a million dollars. And it's true. Like the math

00:27:58.200 checks out, you can get to a million dollars if you do this, but you are going to be miserable.

00:28:04.380 And it puts you in a position where you are obsessed. This is kind of what we talked about

00:28:09.920 at the beginning of the show. You are obsessed with money. Every financial decision becomes this

00:28:15.600 crisis or this huge decision. And it's a terrible way to live your life. So basically the whole

00:28:21.900 premise of the book is that the little things, whether it's lunch or coffee or clothes or stuff

00:28:27.560 like that, the little things do not matter at all. It's the big things. It's your house, it's your car

00:28:35.600 and your student loans, and it's really nothing else. And if you get those three things, right,

00:28:41.220 if you don't screw up those three decisions, then you can spend $25 on lunch without breaking a sweat.

00:28:48.660 It's really not that hard. Yeah. I imagine there's some people out there who get off on

00:28:53.700 the austerity. They actually enjoy clipping coupons. They get a rush out of it, but they might be making

00:28:58.620 their family miserable. It stresses their kids out because they see mom and dad just obsessed with

00:29:03.540 money all the time. I grew up in Connecticut and Connecticut culturally is kind of an interesting

00:29:09.660 place because, you know, Connecticut's are known as nutmeggers. It's kind of a derisive term in

00:29:16.900 Connecticut. A nutmegger is somebody who is cheap and clips coupons and stuff like that. And I grew

00:29:22.540 up in a family like that. Like we used to get a piece, if we got a piece of mail, like we used to

00:29:27.380 check to see if the stamp was hit by the canceling stamp. And if we got a piece of mail where the stamp

00:29:34.420 wasn't touched, then we would cut it out and save it and glue it on another envelope. And it was the best

00:29:40.500 thing in the world because we saved 29 cents. Like that was the environment that I grew up in. It just does

00:29:47.000 not matter. These things do not matter at all. Okay. So being too austere, that can make you stress out

00:29:54.200 even more when you're trying to reduce financial stress. So what should the mindset towards money be that

00:29:59.920 you're striving for? It's really about balance. It's about balance. Just as it's possible to spend

00:30:06.920 too much money, it is also possible to spend too little money. Now, if you spend too little money,

00:30:13.600 you're never going to go bankrupt. You're not going to have these financial problems.

00:30:17.640 But what's going to happen is it's going to harm your relationships with other people.

00:30:22.380 And I'm sure you know somebody in your family or a friend that is really, really cheap

00:30:26.580 and they never take out their wallet to pay the bill for dinner. And they don't give gifts at

00:30:32.060 Christmas and they do all this stuff. And they're just hard to be around. It's hard to have a

00:30:36.060 relationship with these people. So on one hand, the people who spend too much, they can affect their

00:30:42.240 financial well-being. The people who spend too little, it affects their relationships with other

00:30:47.680 people. So how do you know? Okay. So let's say someone's listening and maybe they've got a mortgage,

00:30:54.040 they've got a car payment, maybe they're paying down some student loans. How can you take this

00:30:59.340 approach to money where you're not focusing so much on the little things like giving up a coffee

00:31:05.180 or whatever, while still trying to aggressively pay down the stuff you've got on your plate?

00:31:11.200 Well, I will say that there's two phases of life. And in the first half of your life,

00:31:16.840 you're in accumulation mode where you're working, you're saving, you're paying down debt,

00:31:22.200 and you're investing. And you do that till about age 45. And then at age 45, you're in decumulation

00:31:28.940 mode. You're selling stocks, you're selling bonds, you're selling assets, you're spending the money,

00:31:35.040 and you're having a good time. So there is a period of time in your 20s and 30s when you do have to

00:31:42.860 undergo some austerity, but that's the right time to do it. It's much easier to do austerity in your

00:31:50.620 20s and 30s than it is in your 60s and 70s. I think we all want a comfortable retirement.

00:31:56.360 And the saying is, you have a choice. You can either eat ramen in your 20s or you can eat Alpo

00:32:03.240 in your 70s. Yeah, I'd rather eat the ramen in my 20s. So the overall goal is just to have a healthy

00:32:10.580 relationship with money. Someone who's super frugal and someone who's a lavish spender, they probably

00:32:16.620 have more in common than you think because they're both thinking about money all the time.

00:32:22.660 When you're younger, you might think about cutting spending more. But if you get those

00:32:26.860 big financial decisions right, so like you said, college loans, car, house, you can eventually get

00:32:33.700 to a place where you don't have to think about money so much. But you also say that in every phase

00:32:39.400 of life, instead of just thinking about cutting expenses, we should also be thinking about increasing

00:32:45.640 our income. In your experience, what are the biggest obstacles for making that happen? What

00:32:50.960 holds people back from making more money? I think the reason that people don't do it

00:32:56.740 is that it never occurs to them to do it. Like they've never been told that. Nobody has ever told

00:33:02.360 them, look, like if you have this problem where you don't have enough money, there's two solutions

00:33:08.360 to this. One, you can just cut expenses, but two, you can grow revenue. There's a bunch of things you

00:33:13.280 could do. You could get a raise. You could switch jobs. You could go back to school to get another

00:33:20.740 job that pays more. You can do the passive income thing. You can be a landlord. You can start a

00:33:26.480 business. These are all things that you can do. Look, even an extra $10,000 or $15,000 a year for a lot

00:33:33.560 of people makes a huge difference. And by the way, making more money is a lot more fun than cutting

00:33:40.660 expenses. Cutting expenses sucks. It's the worst. That austerity is terrible. But if you were to get 0.99

00:33:47.980 a side hustle and make an extra 10 or 15 grand a year, that is actually fun. And you put the stuff

00:33:54.180 to the test. Like when you were in the Coast Guard, you were like, I'm not making much money. I need to

00:33:58.900 make more money. I'll go get my MBA. And then a couple of years later, you're making lots more money

00:34:05.320 than you were in the Coast Guard. Yeah. About 20 times more. Right. So yeah, I think that's a good

00:34:12.100 reminder. If you're feeling pinched in your wallet, yeah, there's a place for cutting expenses. Maybe

00:34:18.220 there's stupid stuff you're spending money on. You probably shouldn't spend your money on. Do you 1.00

00:34:21.260 need all those subscriptions? But always think about, well, how can I make more money? And there's

00:34:25.660 different ways you can do that. You ask for a raise. We had a podcast with Noah Kagan, where he talked

00:34:30.840 about how you can start a business in a weekend, in 48 hours. And you can make a decent chunk of

00:34:35.340 change that can change your life by spending a little bit extra time on the weekend coming up

00:34:40.600 with a business. There's 24 hours in the day. We work about eight hours. We sleep about eight hours.

00:34:46.900 That's eight hours left over. You can accomplish a lot with that time. So we talked about the stress

00:34:53.240 that comes from debt. Let's talk about the stress that comes from financial risk. What can people do to

00:34:59.100 mitigate stress from risk in their lives? Well, what we have in the U.S. today, the conventional

00:35:06.780 wisdom is that you should put all your money in the S&P 500 index fund and just dollar cost average

00:35:14.560 that over time. It returns 9% a year. And when you retire, you're going to have a few million bucks.

00:35:20.300 That's the conventional wisdom. That works, but it can also cause you a lot of stress along the way.

00:35:28.320 If you invest in the stock market, you get the returns of the stock market, which are very good,

00:35:34.900 but you also get the volatility of the stock market. And the stock market's very volatile.

00:35:41.100 You know, in any given year, it can be up 15 or 20% or down 15 or 20%. And that volatility is going

00:35:49.040 to cause you a lot of stress. It's going to cause you a lot of stress. You know, over the course of a

00:35:54.700 40 or 50 year investing career, the market is going to go down 10% about 20 or 25 times.

00:36:01.940 It's going to go down 20% about seven to 10 times. And it's probably going to go down 50%

00:36:09.560 at least once. There is going to be one time in your life where you have major pucker factor

00:36:15.860 and you are freaking out and you have watched half and God forbid this happens right before

00:36:22.320 you retire, but you've just watched half of your net worth just get vaporized. Like that is a huge

00:36:30.820 amount of stress. I came up with a solution to that called the awesome portfolio, which is stocks,

00:36:38.020 bonds, gold, cash, and real estate and 20% proportions. And the interesting thing about that portfolio is

00:36:45.320 it gives you almost the return of the stock market, but with about half the risk. And I don't know why

00:36:52.580 everybody doesn't want to do this, right? Just you're returning 1% less, but you get half the

00:36:59.240 volatility of an 80-20 portfolio. It's really a magic bullet. Have you done like Monte Carlo

00:37:05.120 simulations on this thing? Like is it stood the test, the stress test? Yeah, absolutely. But the

00:37:11.480 interesting thing about it is if you invest in the awesome portfolio, about 40% of the time you're

00:37:17.840 going to regret it because about 40% of the time the stock market is going to beat the awesome portfolio

00:37:25.100 by 10% or more. But about 20% of the time you're going to be really happy you did it because the

00:37:32.400 awesome portfolio is going to beat the stock market by 10% or more. And those are the years that really

00:37:38.040 counts because that's when you're tested. That's when you have those big bear markets.

00:37:42.500 Like just for example, in 2008 during the financial crisis, the stock market was down 38% that year,

00:37:49.220 but the awesome portfolio was only down 9%. You barely would have even have felt it. And the worst year

00:37:55.980 in the history of the awesome portfolio is down 12%. So you look at this and you're like, okay,

00:38:01.400 I get almost the return to the stock market, half the volatility, and my worst year is 12%.

00:38:07.780 You know, where do I sign up? Why cash? Why keep so much in cash?

00:38:12.560 Well, I used to get that question a lot before interest rates went up when interest rates were

00:38:17.460 zero. You know, now you can actually get 5% on cash, but that, so that makes a lot of sense.

00:38:22.900 You have cash for two reasons. One, it stabilizes the awesome portfolio and reduces the volatility.

00:38:29.640 Two, you should have 20% of your money in cash all the time anyway. Like being fully invested is way

00:38:37.120 overrated. You want to have cash because of the option value of cash, because cash is an option

00:38:43.520 to buy something cheaper in the future. Right. So if you see a good deal on a car, you're like,

00:38:48.740 you've got the cash to do it. So you're going to take out a loan.

00:38:51.720 Yep.

00:38:52.420 Yeah. Do alternative investments like art or cryptocurrency play a role in an awesome portfolio?

00:38:57.800 Well, I get the crypto question a lot. I mean, the problem with putting crypto in the awesome

00:39:04.080 portfolio is, first of all, if you backtest it, it looks great because crypto has gone straight up

00:39:10.800 and anything that goes straight up is going to improve the Sharpe ratio of the portfolio. So it's

00:39:16.000 going to make it look better. But, you know, past is not prologue, right? The problem with putting

00:39:21.680 crypto in the awesome portfolio is that you're going to stare at it all the time. So even if you put 2%

00:39:27.040 of the portfolio in crypto, what is the thing that you're going to watch all the time? You're

00:39:32.320 going to be watching crypto, right? You're going to stare at it all day, even though it's only 2%

00:39:37.540 of your portfolio. And the purpose of volatility is to make people make stupid decisions. So the thing 1.00

00:39:44.360 about the awesome portfolio is, number one, it's not volatile. And number two, with the exception of

00:39:49.700 the stock market, none of the individual asset classes are volatile either. So none of it is going to

00:39:55.700 cause you any heartburn.

00:39:57.440 Yeah. So yeah, again, the goal is to not even think about your money.

00:40:00.000 Yep.

00:40:00.760 Yeah. Well, tell me more about crypto. What's your take on crypto? It's so funny. I remember,

00:40:05.840 you know, four years ago, five years ago, everyone was like, oh, crypto, crypto, crypto. Then like it

00:40:09.920 went down or when stopped talking about it. Now everyone's talking about it again because

00:40:12.700 Bitcoin's, you know, at its all time high or whatever. What are your thoughts on crypto?

00:40:17.300 I have owned it a couple of times. I've made money one time and lost money one time. And

00:40:23.960 on balance, I've made money. I don't like it. It's too volatile. Like I am pretty risk averse.

00:40:31.120 I'm pretty conservative. And, you know, actually back in 2019, I bought a lot of Bitcoin. I bought

00:40:38.160 a huge amount and I sold it in 2021 and I killed it. I did really well. But the whole time that I owned

00:40:44.820 it, I just stared at it all the time. I was always pulling up the Coinbase app. Like it was just,

00:40:50.760 you know, I was really glad when I sold it.

00:40:54.320 Yeah. You became like a coupon clipper, a reverse coupon clipper.

00:40:57.820 Yep.

00:40:58.420 Yeah. Just constantly thinking about it. Well, Jared, this has been a great conversation.

00:41:01.700 Where can people go to learn more about the book and your work?

00:41:04.600 The book is on Amazon or any place you, I mean, it's on Barnes and Noble. It's everywhere.

00:41:10.620 My personal finance website is jareddillionmoney.com. Right on the landing page,

00:41:18.040 you can sign up for a free newsletter. You get my thoughts on personal finance every week.

00:41:22.580 You can follow me on Twitter at Daily Dirt Nap. And yeah, that's pretty much it. I just hope you

00:41:29.080 get the book. It's been a life-changing book for a lot of people.

00:41:31.900 Fantastic. Well, Jared Dillion, thanks for your time. It's been a pleasure.

00:41:35.260 Thank you.

00:41:36.660 My guest today was Jared Dillion. He's the author of the book,

00:41:38.940 No Worries. It's available on amazon.com and bookstores everywhere. You can find more

00:41:42.520 information about his work at his website, jareddillion.com. Also check out our show notes

00:41:46.140 at awim.is slash no worries. We find links to resources. We delve deeper into this topic.

00:41:50.800 Well, that wraps up another edition of the AOM podcast. Make sure to check out our website at

00:42:02.200 artofmanliness.com. We find our podcast archives, as well as thousands of articles that we've written

00:42:06.340 over the years about pretty much anything you think of. And if you haven't done so already,

00:42:09.760 I'd appreciate it if you take one minute to give us a review on the podcast or Spotify. It helps out

00:42:12.940 a lot. And if you've done that already, thank you. Please consider sharing the show with a friend

00:42:16.560 or family member. You think we get something out of it. As always, thank you for the continued

00:42:20.440 support. Until next time, it's Brett McKay reminding you to not listen to the AOM podcast,

00:42:23.900 but put what you've heard into action.

The Art of Manliness - April 29, 2024

How to Eliminate the Two Biggest Sources of Financial Stress

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